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Analysts believe that while Singapore’s real estate investment trusts, or S-REITs, could face a downward market correction once the United States Federal Reserve decides to raise interest rates next month, the impact will be mitigated since most of them have already refinanced into fixed-rate loans, reported Today Online.
“Most REITs have restructured their borrowings to fixed interest rates, rather than floating rates, so rising interest rates would not have as significant an impact as they would have had before,” said Carmen Lee, head of OCBC Investment Research.
“If the Fed does raise rates this time around, we anticipate a short and quick correction in the REIT sector, but prices would normalise after that.”
In fact, around 80 percent of S-REITs’ interest costs have hedged into fixed-rate loans, said DBS Group Research vice president Derek Tan.
Moreover, the small portion of total loan book requiring renewal each year and revenues that are still expected to grow also help in cushioning the effect of increasing borrowing costs.
“The impact of the Fed hike is expected to result in the yield curve flattening out — the shorter end of the yield curve will move higher compared to the longer end of the yield curve. This is expected to result in refinancing cost to increase, which will be negative for S-REITs when they renew their loans,” noted Tan.
“(But) the impact of a one percent increase in interest costs will take at least three years to filter through to earnings, and by that time, revenues will have already risen by a much higher rate.”
Nikki De Guzman, Editor at CommercialGuru, edited this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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