Hey savvy investors, welcome back to ‘The Dividend Uncle’! This is your friendly neighbourhood Dividend Uncle, and boy, what a difference a few months can make!

Just three months ago, I made a video and post telling investors to hold on and not give up on Singapore REITs, because a rally was on the horizon. Well, that rally is now here, and the results are incredible. The CSOP iEdge S-REIT Leaders ETF has surged by an impressive 13%! Now the big question on everyone’s mind is: are we too late to join the party, or as I would ask my friends at the kopi tiam, “can buy or not ah”? Well, stay tuned because today we’re diving into why this REIT rally might just be getting started.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Now, let’s dive right in. 

The Recent REIT Rally: What’s Driving It?

The recent surge in REIT prices has been driven by expectations of a major event, the start of rate cuts by the US Federal Reserve. In recent weeks, the market shifted its expectations toward a 50bps interest rate cut, up from the earlier anticipated 25bps cut. And true to form, the US Fed didn’t disappoint. The official 50bps cut on 18 September is now adding even more momentum to the earlier surge, especially in blue chip REITs and higher-risk sectors like the US Office REITs.

The rally has been impressive! Singapore REITs, tracked by the CSOP iEdge S-REIT Leaders Index, have gone up by 13% since July! That’s a huge jump, and it’s all thanks to the growing certainty that interest rates will be coming down.

With this recent boost, REITs have already rallied significantly, but the key question now is: does this rally have legs to run further?

Why This Rally Has More Room to Run

I believe we’re still in the early stages of a longer bull run. The REIT rally we’ve seen so far is just the beginning. And let me tell you why.

Firstly, interest rates are now definitely moving downward, with the US Fed’s first rate cut announced to be the first of several to come in 2024 and 2025. Lower interest rates make borrowing cheaper for REITs, which rely heavily on debt to finance their operations and acquisitions. This improves their margins and profitability, and most importantly, distributions in dollar terms. On a relative basis, the dividend yields will become more attractive for investors seeking income, especially compared to the so-called risk-free assets.

Secondly, we’re seeing institutional investors reallocating funds into REITs. When moving into specific sectors as part of their reallocation strategies, these big players are favoring large-cap, blue-chip REITs for their stability, and liquidity. This include CapitaLand Integrated Commercial Trust, CapitaLand Ascendas REIT, Mapletree Industrial Trust and Mapletree Pan Asia Commercial Trust.

When they move huge amounts of funds into the individual REITs, they need larger cap REITs to be able to execute their buy orders without pushing up the prices too much. This is why I’ve been accumulating the larger, blue-chip REITs in anticipation of this sizable inflows. As more institutional investors join the “party”, the prices will continue to be driven higher.

Thirdly, it’s important to remember that many REITs were oversold during the downturn. Sentiments towards many REITs were negative, and hence trading at extremely low prices. This includes some REITs with solid fundamentals overall, but were punished severely due to certain idiosyncratic risks.

Now, throughout the year, I have been analyzing these potentially undervalued shares and REITs for my portfolio, and sharing my thoughts with you through my YouTube channel and this website. With the market sentiments rebounding, I believe there’s still a lot of room for recovery, especially as the overall economic outlook continues to look benign.

Two Oversold Stars Ready for a Comeback

For my portfolio, I have been accumulating two blue-chip REITs which I thought were overly-punished by the market. Based on the valuations and yields of their underlying assets, and the worst-case scenarios that could happen, I shared that Mapletree Pan Asia Commercial Trust and Mapletree Logistics Trust seem to be attractively priced and oversold in my earlier videos and posts. And since then, they’ve rallied by 15% and 18% respectively from July!

One reason for this upturn is that institutional investors are increasingly favoring large-cap REITs, but the bigger story here is that both Mapletree Pan Asia Commercial Trust or MPACT and Mapletree Logistics Trust or MLT still have significant upside. Despite their impressive recent rally, their one-year performance remains in the red. This is in contrast to other blue-chip REITs, such as CapitaLand Integrated Commercial Trust, which are above their 52-week highs.

Additionally, both REITs are well-positioned to benefit from further interest rate cuts. For MPACT specifically, 13% of its debt is due for refinancing this year, with another 17% next year. As rates continue to trend downward, this will ease financing costs and improve its margins. Notably, 21% of MPACT’s debt is denominated in Hong Kong dollars, where interest rates closely track U.S. rates. In fact, after the Fed’s recent rate cut on 18 September, Hong Kong immediately followed suit on 19 September, demonstrating the close relationship. This makes MPACT a direct beneficiary of the Fed’s actions, unlike other markets where the link to US rates is less immediate.

For Mapletree Logistics Trust, it also has 16% of its debt due for refinancing in the next 2 years, and has substantial Hong Kong exposure. Furthermore, sentiment for MLT was hit when it suffered its first decline in distribution per unit of D.P.U. in Q2 2024 when it dropped 8.9% due to higher interest expenses. While this may not turn around immediately, the lower interest rate trends will certainly ease the pressure somewhat.

But don’t get me wrong: I’m not under any illusion that their specific risks have disappeared. I’m still keeping a close eye on the recovery of MPACT’s Hong Kong asset, Festival Walk. The challenge of Hong Kong shoppers heading to Shenzhen, China, for cheaper alternatives remains a concern. As for MLT, the sluggish economic performance in China continues to pose a threat to its logistics sector.

That said, I’m still optimistic that both REITs can continue to rally. With strong fundamentals and improving market conditions, both MPACT and MLT are well-positioned for further gains.

The Dividend Uncle’s Take

So, is it too late to invest in REITs?

In my opinion, definitely not. While we’ve seen a significant rally in the past few months, I believe we’re still in the early stages of what could be a longer bull run. The recent rate cuts by the US Fed and improving sentiment around REITs are creating a favorable environment for further upside, especially for blue-chip REITs.

For my own portfolio that I’ve been sharing with you, I’m focusing on quality REITs that are undervalued and have strong fundamentals. MPACT and MLT have been performing well, but I’m still on the lookout for other opportunities. What I’m particularly interested in are REITs that are still undervalued despite the recent rally. Those with strong fundamentals, but temporarily overlooked, have the potential for further upside.

I’m also keeping an eye out for moments of temporary market dips to increase my positions. In every bull market, these opportunities always present themselves. Take September 20th, for example, REITs dropped by 2% for no clear, fundamental reason at all. These kinds of pullbacks are ideal chances to buy in at a discount.

As I conduct my analysis for my personal investment portfolio, I’ll be sure to share my findings and insights with you here on my YouTube channel and this website. After all, we’re in this together, and there’s plenty of room for growth if we stay informed and invest wisely.

So there you have it. My views on the recent REITs rally, and my commitment to share my own analyses and my personal portfolio investments with you. Before you go, please give me a ‘Like” if you found the post insightful: it is the only thing that keeps me going!

Finally, it’s important to stay informed, do your homework, and take a long-term view. See you next time!