The share prices of S-REITs have come under selling pressure over the past two weeks, with the FTSE ST REIT Index (FSTREI) declining 4.3% since 24 Oct. While this is in-line with the broad market weakness (STI down 2.0% during the same period) given uncertainties over the U.S. presidential election, we believe the underperformance can also be attributed to increasing market jitters over the likelihood of a Fed rate hike in Dec this year. Based on the Fed funds futures rate, the probability of a rate hike during the Dec FOMC meeting has risen from 70.9% (as at 24 Oct 2016) to 80.0%.

The Nov FOMC meeting statement released highlighted that while economic activity has improved since 1H16, the Committee has decided to await some further evidence of continued progress toward its employment and inflation objectives. We believe a rate hike in Dec is on the cards, which may result in continued volatility in the share prices of S-REITs. However, in our view, investors should position themselves by taking advantage of weakness in the market to accumulate selective REITs, as the interest rate environment is likely to stay accommodative in the year ahead.

The FSTREI is currently trading at a yield spread of 472 bps against the Singapore Government 10- year bond yield, which is half a standard deviation above the 5-year mean. We maintain our OVERWEIGHT rating on the S-REITs sector.

Our preferred picks are Frasers Centrepoint Trust [BUY; FV: S$2.33], Keppel DC REIT [BUY; FV: S$1.35], Ascendas REIT [BUY; FV: S$2.67], SPH REIT [BUY; FV: S$1.05] and Mapletree Greater China Commercial Trust [BUY; FV: S$1.15].

Source: OCBC Research - 8 Nov 2016