As usual, whenever there is a Great Singapore Sales, everybody rushes into it. But when SGX holds a sales, everybody runs away from it.
The latest SGX sales is on REITs/ Business Trusts (BTs), which have fallen by about 14% from end Apr 13 till end Jun 13 on average. The decline on some individual REITs/ BTs is even more, with Suntec falling by nearly 20%. The trigger for this decline is an impending end to the 3rd round of Quantitative Easing and rise in interest rates in US. It should also be highlighted that prior to this decline, REITs had risen by an average of 36% from end May 12 till end Apr 13. So, is this decline rational and overdone?
Let's us look at the historical yields of REITs and BTs for some answers. The chart below plots the median yields of REITs and BTs, as well as that of the short-term (3-month), medium-term (10-year) and long-term (30-year) Singapore Government Securities (SGS) benchmark bonds. The chart also plots the movement of share prices as represented by the Straits Times Index. (See REIT Yield Statistics on how the yields were derived and important points to note for this statistics).
|Historical Median REIT/ BT Yield (Jun 13)|
Prior to the Global Financial Crisis (GFC), the median yield of REITs hovered between 4% and 6%. This spiked up during the GFC between May 08 and Apr 10. If we discount the spike in yields during the GFC, the normal range of yields should be between 4% and 7.5%. Just before the latest decline, the median yield was at 5.14% in end Apr 13, which is within the normal range.
The chart below further plots the cumulative distribution of the historical median yields since Sep 03. It also includes a breakdown for the various sectors. The squares represent the median yields in end Apr 13 before the decline while the triangles represent that in end Jun 13.
|Cumulative REIT Yield Distribution (Jun 13)|
The median yield for all REITs before the decline in end Apr is around the 37th percentile, meaning the historical median yields exceed the prevailing median yield 63% of the time. This means that REITs were overvalued in end Apr, but not excessively so. Nevertheless, the median yields for individual REIT sectors indicate that they could be overvalued. For example, the median yield for the Healthcare sector was reaching new highs while that of the Retail sector was exceeded 80% of the time historically. So, some amount of decline was not unexpected.
After the decline in end Jun, the median yield for all REITs is around the 62nd percentile, indicating some undervaluation. The valuation for the various individual sectors have also become more attractive, hovering between the 47th to 66th percentiles for most sectors. The only sector that still indicate a high valuation is the Healthcare sector, whose median yield is around the 6th percentile level. So, for most sectors, the decline has led to more attractive valuations, but the valuation might not be sufficiently attractive for every investor.
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