Here's what S-REITs must be dealing with amidst the Fed's tapering hubbub

Not about where rates are at.

According to CIMB, the Fed has postponed the start of monetary stimulus wind down, and is now expected to begin tapering only in Jan 2014. This news has driven US long bond yields down overnight, with the 10YSGB down 30bps (236bps) from the last high.

This is clearly positive news for interest-rate sensitive property stocks. "We expect positive share price movements for S-REITs and developers in the near term," CIMB said.

Here's more from CIMB:

However, we note that while the Fed tapering is delayed, interest rates remain on an upward bias. S-REIT yields could compress with the 10YSGB but investors should be mindful that S-REITs typically do not perform well in a climate of interest-rate uncertainty.

We think that it is not where rates are at, but rather when will they stabilise and at what levels. S-REITs trade at c.396bp spread over the 10YSGB, 1x P/BV and FY14 yields of 6.3%, within the historical average – not cheap but also not expensive.

For now, S-REITs look like a good trade, with those that de-rated the most in the last three months could also rebound the most.

Our preference remains in the developer space, where a diversified structure and much cheaper valuations (30% discount to RNAV in the sector, c.0.5 s.d. below mean) allow for more downside protection.

Firmer S-REIT share prices and more stable interest rates are also conducive for asset recycling growth. We see developer stocks as cheaper proxies to near-term asset reflation.

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