Bookmark & Share
The market for Singapore Real Estate Investment Trusts (S-REITs) has rebounded this year reflecting expectations that the interest rate hike will probably happen at a much later date, according to media reports.
In May 2013, the US Federal Reserve signalled that it will end its Third Quantitative Easing Program (QE3). Consequently, the 10-year Singapore government bond benchmark rose from 1.4 percent to 2.8 percent in the subsequent six weeks, leading to a 19 percent drop in the FTSE ST REIT Index.
But since February 2014, the index has picked up and even outperformed the Straits Times Index (STI). It climbed by nine percent year-to-date versus the latter’s 5.8 percent gain over the same period.
Economists believe the rate hike of about 25 basis points (bps) could start from June 2015. And the current prices of REIT securities have partially taken this into account.
Higher interest rates would affect S-REITs in two major ways. Cost of S-REITs will increase and they will shoulder greater re-financing risks. It will also lower the valuation of properties held by these trusts.
Fortunately, most S-REITs have fixed their interest rates before the expected taper. They also prolonged their loan tenures, while spreading out their debt repayment schedule so that their refinancing each year would not exceed a certain amount. DMG & Partners Research estimates the figure is at S$7.4 billion
In addition, these trusts have hedged by using derivatives like interest rate caps and interest rate swaps. They also issued fixed-rate medium-term notes to raise money.
OCBC’s Investment Analyst Eli Lee, revealed that about 75 percent of S-REITs’ debt exposure has been hedged into fixed rates.
“According to our sensitivity analysis, for every percentage point increase in interest rates, the distribution per unit (DPU) impact among the S-REITs is contained within a 10 percent decline.”
“Stress test results indicate that S-REITs are currently well placed to weather interest rate hikes. Under a stress scenario of a three percentage point increase in interest rates and 10 percent fall in earnings before interest, taxes, depreciation and amortisation (Ebitda), the sector’s median interest coverage ratio would still be relatively healthy at 3.6 times,” he noted.
This means the profit of the S-REIT market can sufficiently repay the total interest of its existing debt multiplied by 3.6 times, while the sector’s current interest coverage is fairly healthy at 5.9 times, Lee added.
Muneerah Bee, Senior Journalist at PropertyGuru, edited this story. To contact her about this or other stories email muneerah@propertyguru.com.sg
Related Articles:
UOL Group to open new mall in Paya Lebar