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Singapore, Dividend

T-bills vs REITs – What are we buying now as inflation eases?

12 Nov 2022

REITs have bounced as slowing inflation has led to expectations that peak interest rates are in sight. We analyse if they are more attractive now compared to T-bills.

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TL;DR

  • With inflation showing signs of coming down, investors are now expecting a slower pace of interest rate increases. This has helped to lift sentiment for the REITs. 
  • REITs offer a dividend yield of 7.2% on average, higher than the yield on the 6-month T-bill of 4.0% p.a.
  • If we believe that interest rates will start declining or are taking a longer term view, then it might be worthwhile to start looking at the REITs.
  • If we prefer something that is safer and offers a regular interest payment, then the T-bill might be worth a look. 

What happened?

Apart from the FTX collapse and easing of Covid-19 measures in China, the other big news in financial markets in the past week was the easing of inflation in the US. 

The Consumer Price Index (CPI) for October rose by just 7.7%, compared to economists’ forecast of 7.9%.

The market moved very quickly in reaction to the lower than expected inflation data. 

The S&P 500 rose 5.9% for the week. The NASDAQ was up by 8.1%. Cathie Wood’s ARK Innovation Fund soared by 14.6%.

Analysts now expect a less aggressive pace of interest rate hikes by the Fed. 

The US 10-year government bond yield fell by about 0.30 percentage points (0.30%) to 3.82%.

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Source: Tradingview

The sharp movements were also reflected in Singapore REITs. 

CapitaLand Integrated Commercial Trust rose by about 8.5% for the week as the lower interest rate expectations led to improved sentiment for the REITs. 

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Source: Google

On the other hand, investors who bid for the 6-month Singapore government bond were slightly disappointed that the cut-off yield fell to 4.0% p.a. from 4.19% p.a. in the previous auction as demand surged. 

And this was before the inflation data came out and bond yields fell. 

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Source: MAS

We’ve since received questions on whether it still makes sense to be putting our money into T-bills. Or should we be looking at REITs instead? 

REITs vs T-bills – What are we be buying now?

To answer the question, we asked ourselves the following questions:

  • Do REITs or T-bills offer a higher dividend yield?
  • Do REITs or T-bills offer more certainty on returns?
  • Do REITs or T-bills fit within our investment horizon?

#1 – Do REITs or T-bills offer a higher dividend yield? 

The 42 S-REITs and property trusts listed on the SGX offer an average dividend yield of 7.2% as of 30 September 2022. 

The dividend yield is highest for office REITs, which offer an average dividend yield of 8.7%.

Retail REITs and industrial REITs also offer a decent average dividend yield of 6.7% and 6.2% respectively. 

This is higher than the yield of 4.0% p.a. offered by the 6-month T-bill during the last auction on 10 November. 

On a headline basis, REITs offer a higher yield compared to T-bills currently. 

This leads us to the next question – how certain are returns on the REITs and are the risks worthwhile?

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#2 – Do REITs or T-bills offer more certainty on returns? 

In our introduction guide, we shared that T-bills are fully backed by the Singapore government and offer a sound way for you to earn a regular interest payment. 

T-bills offer a sound way for you to earn a regular interest payment and diversify your investment portfolio.

You’d get back your capital at maturity of the T-bill so long as the government does not default. 

This means that apart from not knowing what the interest rate is at the time of application, there is a high degree of certainty on returns after the auction. 

However, the same can’t be said of REITs. 

REITs are funds that invest in a portfolio of property assets such as shopping malls, offices or hotels. 

Naturally, REITs carry a higher degree of risk compared to T-bills. It's important to bear in mind REITs are equity instruments first, which are more volatile compared to debt instruments (eg T-bills)

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For example, we’d need to look at the rental income generated from the property, and how the REIT could be impacted by changes in interest rates. 

As we shared in our recent deep-dive on the REITs, REITs with retail, office and hospitality assets in Singapore have benefited from rising rents in recent quarters. 

However, their share prices have been hit significantly due to investor concerns about how rising interest rates could drive weaker rental prospects and increasing borrowing costs. 

If interest rates were to start falling, these concerns could ease and REITs could see a bounce. 

However, this is dependent on what the Fed does in the coming months. There is hence greater uncertainty about how the REITs will perform when compared to the T-bills. 

#3 – Do REITs or T-bills fit within our investment horizon? 

We’ve also been sharing why we need to consider reinvestment risk and the time period of the investment when assessing different options in the market. 

After all, while the T-bill may be able to offer a good return for 6 months, we need to also think about reinvestment opportunities when we get back the money upon maturity. 

The risk is that interest rates are lower when we get back from the money from the bonds that are maturing.  

If we were to buy REITs today, one of the reasons might be to earn a good passive income over the long term. 

After all, Singapore REITs have generated a 10-year total return of 74.7%, based on the FTSE ST REIT Index as of 30 September 2022.

This works out to an average return of about 5.7% per year over the last 10 years. This is despite the 8% correction we have seen year-to-date. 

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Source: SGX

What would Beansprout do?

The initial signs of inflation peaking will leave more room for the US Federal Reserve to slow down the pace of interest rate increase.

However, this does may not mean that interest rates will come down immediately. If interest rates remain higher for longer, it could still be negative for yield sensitive sectors like REITs. 

After all, Fed Chairman Jerome Powell had just warned last week that interest rates may get higher before they come down. He also said that “it is very premature to be thinking about pausing…very premature.”  

What we’re looking out for

We’d continue to look out closely for inflation data, as one datapoint from the October CPI does not represent a trend. 

For example, while the price that US consumers are paying for goods has come down, the price that they are paying for services remain stubbornly high. 

This is something that the Fed will be keeping a close lookout for as services tend to be less volatile and incorporate more labour costs. Price increases here could prove to be more persistent.

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The verdict on REITs vs T-bills

In short, it depends on where we think interest rates will move from here. 

If we believe that inflation will come down further and the Fed might start to bring down interest rates, then it might be worthwhile to start looking at the REITs.

If we are taking a longer term view and are looking at the potential dividend income that REITs are able to generate, then we can take a look at the REITs too. However, it pays to be selective when deciding which REITs to buy. If unsure about what to look out for, feel free to ask us at the Beansprout Telegram group. 

On the other hand, if we prefer something that is safer and offers a regular interest payment, then the T-bill might be worth a look.

We also believe that it is important to have a diversified portfolio, as we share in how we’d allocate our money in today’s environment.  

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