I initiated a position in NikkoAM-STC Asia ex Japan REIT ETF (SGX: CFA) last November, anticipating the promised rate cuts. These cuts materialised in July, totalling one percent by yesterday’s FED meeting.
While the initial rate cut was met with market optimism, subsequent concerns arose due to potential renewed inflation and reduced rate cut expectations following Trump’s election victory. Yesterday’s higher-than-expected fund rate projections, of 3.9% by end of next year and 3.4% by end of 2026, further solidified these concerns.
Despite the cautious outlook, the FED’s signalled rate cuts suggest eventual lowered borrowing costs and increased likelihood of sustainable distribution per unit (DPU) for the larger REITs.
Even considering a further 10% DPU reduction for CFA in the upcoming year, my projected DPU of S$0.041 offers an attractive yield of around 5.4%, almost a 3% premium over CPF Ordinary Account (OA) interest.
To me, that’s a good enough spread to increase my investment in CFA.
That said, market sentiment on Singapore REITs (S-REITs) might become even more negative, hence I’ve decided to spread out my purchase over a few tranches. Base on current thinking, the next price which I might consider to increase my position will be around S$0.70.
A secondary benefit for this investment is that it can provide me with more cash for other opportunities. As an ETF, CFA holds a basket of REITs, some of which I already own individually with cash investment. By increasing my position in CFA through my CPF Investment Scheme, I can potentially reduce my direct holdings in these REITs, freeing up the cash.
Finally, there’s no guarantee FED’s projection will materialise. A potential resurgence of inflation could prompt a policy reversal, exerting further pressure on S-REITs. Instead of predicting what will happen, I position my portfolio to limit the downside and capitalise on the potential upside.
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