Wow, this is really bad news! Early US economic data for the first quarter of 2025 is pointing towards negative growth, according to the Federal Reserve Bank of Atlanta. If we have 2 consecutive quarters of negative growth, then techincally, the US would be in an economic recession. What this means is that the probability of two or even more Federal Reserve rate cuts has just increased drastically.
1. The Call to Buy REITs as Interest Rate Cuts Will Mean Huge Savings in Financing Cost is a Fallacy.
Interestingly, a number of folks on social media have mentioned that now maybe the best time to buy into REITs which have been performing badly and in the doldrums. Nevertheless, it is important to note that a financing cut may not lead to a rally in SREIT market price because the main factor is still whether the REIT can continue to generate sustainable rental income. Many businesses will be severely impacted and there will be increased in bankruptcy from firms and consumers. There will also be widespread retrenchment of staff (which we are already seeing for a number of years).
Not suprisingly, during past recessions, most of the REITs will have substantial drop in their market price (along with the broad market sentiment) despite a lower interest rate environment. So far, I have not seen REITs price rally in past recessions. Do remember that REITs are still equities afterall and underlying business fundamentals are still the essential determinant of its market price. This is unlike bonds instrument whereby their market price soar when interest rate is being cut- this is the basic 101 inverse relationship of bond price vs the market financing rate.
2. REITS I Will Try Avoiding During Recession
Personally, I will be avoiding the following REITs sector:
(1) Hospitality REITs- if everyone is struggling with bread and butter, no one will be in the mood for travelling; demand will thus plunge.
(2) Office Commercial REITs- Too cyclical and unpredictable.
Instead, I think that shopping mall REITs (Frasers Centrepoint Trust and Lendlease REIT) as well as Industrial REITs (backed by Temasek Holdings) will be a safer buy while waiting for the market to recover. Special theme REIT like strip malls with grocery focused business (United Hampshire US REIT) should also be a safer place to ride out the recession.
Parting Thoughts
With a narrowing net interest margin spread, bank stocks like DBS, UOB & OCBC will find their earnings dipping soon as they have peaked. SREITs will also be in the doldrum for at least another year or two. So will you folks be making any adjustment to your current portfolios?
