Expectations of a rate hike has spiked up since early March
Source: Bloomberg World Interest Rate Probability (data as of 13 March 2017) Potential Impact of a Rising Interest-Rate Environment A rising interest-rate environment typically points to improving economic conditions and may have an impact on different equity sectors in the market. Banks, Industrials, and other cyclical sectors typically benefit from an interest rate cycle. Specifically for banks, net interest margins (NIMs) typically increase from higher interest rates. Cyclical sectors also typically benefit as an improving global economy will likely result in an increase in capital spending. Conversely, defensive sectors such as real estate investment trusts (REITs), utilities, and telecommunication services have a history of underperforming. These sectors typically have higher dividend yields and rising interest rates may make these sectors less attractive from an investor’s standpoint. Specifically for REITs, higher interest rates may lead to a rise in financing costs, impacting profitability and the ability to acquire assets. Banks Saw Strong Returns Since November 2016 Singapore banks have an average total return of 17.8% since 8 November 2016, outperforming the STI’s 12.2%. The strong returns are backed by a net buy of S$1.43 billion by institutional investors during the same period (according to SGX data). The three Singapore banks are trading at a price-to-book (P/B) ratio of 1.1x with an ROE of 10.0%.Strong net buying activities in Financials stocks since Nov-16 (S$M)
Source: SGX data Beyond rising interest rates, asset quality remains a focus for Singapore banks in 2017. According to Moody’s Investors Service, Singapore banks saw further decline in profitability and mixed asset quality performance in 2016, but expect pressure on credit costs and net interest margins to subside this year, providing support to profitability. The table below details the three banks and is sorted by market capitalisation. Click on each stock to visit its profile page on SGX Stock Facts.Name | SGX Code | Market Cap S$M | Total Return YTD % | Total Return 1 Yr % | Total Return 3 Yr % | P/E | P/B | Dvd Ind Yld % | ROE % |
DBS Group Holdings | D05 | 48,133 | 10.2 | 30.5 | 34.0 | 11.2 | 1.1 | 3.1 | 10.0 |
Oversea-Chinese Banking Corp | O39 | 40,001 | 7.7 | 13.8 | 18.2 | 11.6 | 1.1 | 3.7 | 9.9 |
United Overseas Bank | U11 | 34,997 | 5.3 | 19.7 | 20.8 | 11.5 | 1.1 | 3.2 | 10.2 |
Average | 7.8 | 21.3 | 24.3 | 11.4 | 1.1 | 3.4 | 10.0 |
SG REIT Sector yield spread at c430bps
Source: Bloomberg According to a report by MAS, S-REITs have also improved their debt profiles – where the weighted-average debt maturity in the sector has increased to 3.5 years, from 3.2 years in 2013. Based on MAS analysis, S-REITs appear well-placed to withstand interest rate hikes as they have used derivatives to convert part of their floating-rate borrowings to fixed rates. Stress tests on S-REITs also showed that their median interest coverage ratio (ICR) remains at a healthy ratio of 4.0 after hedging, even when interest rates rise by 3 percentage points. For more information click here. S-REITs are relatively less levered, having an average net gearing ratio of 33.3%, which is well below the maximum of 45% as set by the Monetary Authority of Singapore (MAS). Investors who would like to invest in REITs for sustainable income and long term capital growth can consider the upcoming NikkoAM-StraitsTrading Asia Ex Japan REIT ETF to be listed on 29 March 2017. The REIT ETF provides a broad exposure to diverse properties sectors across the region (estimated 70% exposure to Singapore listed REITs) and has an indicative net dividend yield of more than 5% per annum. In a recent retail seminar, NikkoAM provided some key points on the impact of rising interest rates on REITs:- While rising interest rates are a headwind for REITs, most REITs in the Asia ex-Japan REIT ETF have a significant portion of their debts pegged to fixed interest rates (at about 70%)
- Every 100 basis points hike in interest costs is estimated to have a 2% negative impact on annual earnings and dividends. The impact is spread over several years given that a significant portion of the debt is pegged to fixed rates.
- Net profit and DPU are more sensitive to top-line growth than a rise in interest expense. It is estimated that every 1% rise in revenue can offset a 7.6% rise in interest expenses.
Name | SGX Code | Market Cap S$M | Gearing % | Total Return YTD % | Total Return 1 Yr % | Total Return 3 Yr % | P/B | Dvd Ind Yld % |
Cache Logistics Trust | K2LU | 725 | 42.8 | 2.3 | 5.5 | -7.7 | 1.0 | 9.1 |
Sabana Shari'ah Compliant Industrial REIT | M1GU | 479 | 42.8 | 22.5 | -8.9 | -34.2 | 0.6 | 7.7 |
IREIT Global | UD1U | 448 | 41.4 | 6.5 | 15.1 | N/A | 1.1 | 8.6 |
Mapletree Logistics Trust | M44U | 2,663 | 39.5 | 6.8 | 16.6 | 28.0 | 1.0 | 7.0 |
Mapletree GCC Trust | RW0U | 2,712 | 39.4 | 2.6 | 13.4 | 40.8 | 0.8 | 7.4 |
Ascott Residence Trust | A68U | 1,802 | 38.9 | 4.5 | 8.2 | 18.5 | 0.9 | 8.1 |
OUE Hospitality Trust | SK7 | 1,224 | 37.8 | 5.1 | 4.7 | 8.6 | 0.9 | 8.0 |
OUE Commercial REIT | TS0U | 886 | 37.7 | 1.4 | 9.4 | 17.2 | 0.7 | 7.1 |
Frasers Hospitality Trust | ACV | 1,240 | 37.5 | 4.6 | -1.2 | N/A | 0.9 | 9.0 |
Cambridge Industrial Trust | J91U | 744 | 37.3 | 7.4 | 12.8 | -1.1 | 0.9 | 7.1 |
Ascendas REIT | A17U | 7,119 | 37.1 | 12.4 | 11.2 | 41.7 | 1.2 | 6.3 |
Soilbuild Business Space REIT | SV3U | 664 | 37.0 | 1.7 | -4.3 | 7.7 | 0.9 | 9.9 |
Viva Industrial Trust | T8B | 752 | 36.8 | 4.0 | 18.1 | 32.3 | 1.0 | 9.0 |
CDL Hospitality Trusts | J85 | 1,380 | 36.6 | 8.7 | 16.4 | 6.2 | 0.9 | 8.0 |
Manulife US REIT | BTOU | 743 | 36.6 | 3.1 | N/A | N/A | 1.1 | 4.2 |
Suntec REIT | T82U | 4,427 | 36.4 | 8.3 | 11.7 | 24.3 | 0.8 | 5.9 |
Parkway Life REIT | C2PU | 1,458 | 36.2 | 4.3 | 8.6 | 22.6 | 1.4 | 5.0 |
Frasers Commercial Trust | ND8U | 1,002 | 35.9 | 1.2 | 7.7 | 22.7 | 0.8 | 8.0 |
Mapletree Commercial Trust | N2IU | 4,235 | 35.1 | 8.1 | 11.1 | 46.5 | 1.1 | 5.6 |
CapitaLand Retail China Trust | AU8U | 1,241 | 35.1 | 7.2 | 7.5 | 26.1 | 0.9 | 6.7 |
Starhill Global REIT | P40U | 1,592 | 34.8 | 1.0 | 3.9 | 15.5 | 0.8 | 6.9 |
Far East Hospitality Trust | Q5T | 1,056 | 33.1 | -0.6 | -1.0 | -11.7 | 0.6 | 7.6 |
Keppel REIT | K71U | 3,385 | 32.9 | 2.0 | 10.0 | 7.2 | 0.7 | 5.8 |
Ascendas Hospitality Trust | Q1P | 843 | 32.7 | 6.4 | 5.2 | 28.4 | 0.9 | 7.1 |
CapitaLand Commercial Trust | C61U | 4,540 | 32.7 | 7.3 | 13.0 | 23.3 | 0.9 | 6.1 |
AIMS AMP Capital Industrial REIT | O5RU | 849 | 32.3 | 3.6 | 6.8 | 28.4 | 0.9 | 8.3 |
CapitaLand Mall Trust | C38U | 6,860 | 31.8 | 4.5 | -3.0 | 20.3 | 1.0 | 5.9 |
Lippo Malls Indonesia Retail Trust | D5IU | 1,094 | 31.1 | 7.8 | 38.0 | 26.1 | 1.0 | 8.9 |
First REIT | AW9U | 992 | 30.8 | 3.7 | 12.8 | 46.1 | 1.3 | 6.6 |
Keppel DC REIT | AJBU | 1,296 | 29.7 | 2.4 | 19.1 | N/A | 1.2 | 4.8 |
Fortune REIT | F25U | 2,961 | 29.3 | -0.8 | 15.3 | 91.1 | 0.7 | 5.8 |
Frasers Centrepoint Trust | J69U | 1,807 | 28.3 | 5.7 | 5.3 | 37.1 | 1.0 | 5.8 |
Mapletree Industrial Trust | ME8U | 3,010 | 28.2 | 3.0 | 14.4 | 55.8 | 1.2 | 6.8 |
BHG Retail REIT | BMGU | 333 | 28.0 | 3.8 | -11.6 | N/A | 0.8 | 3.8 |
Frasers Logistics & Industrial | BUOU | 1,351 | 27.8 | 3.2 | N/A | N/A | 1.0 | 1.9 |
SPH REIT | SK6U | 2,464 | 25.5 | 2.4 | 6.4 | 14.8 | 1.0 | 5.6 |
EC World REIT | BWCU | 580 | 18.8 | 0.0 | N/A | N/A | N/A | 2.0 |
Saizen REIT* | T8JU | 15 | 0.0 | -43.1 | -24.6 | 10.6 | 1.7 | N/A |
Average | 33.3 | 3.5 | 7.8 | 22.4 | 1.0 | 6.7 |
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