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Singapore real estate investment trusts (S-REITs) are facing greater borrowing costs and might face more headwinds as the US Federal Reserve is expected to raise its interest rates as early as September, according to a report from Credit Suisse.
In Q1 2015, the borrowing costs of S-REITs rose by as much as 0.4 basis point as the three-month Singapore Interbank Offered Rate (SIBOR) rose sharply by 37 basis points (bps) year-to-date.
The Swiss financial institution believes that the three-month SIBOR would hit 1.0 percent by year-end, before doubling to 2.0 percent by the end of 2016. As for the ten-year treasury yield in the United States, it is expected to rise by 23 bps to 2.55 percent in 2015 before touching 2.8 percent by end-2016. Notably, the three-month SIBOR roughly follows the movement of the US ten-year treasury yield.
But among the REIT segments, the office sector could be the most heavily affected due to a large upcoming supply, said Credit Suisse.
“While we cannot ascertain how interest rates will move in the near term, fundamentally,
we see the strongest headwinds for office REITs with 4.6 million sq ft of space entering the market in 2016/17E.”
“Historically, net demand has averaged 1 million sq ft per annum, which implies that system occupancy could drop to 86.7 percent from 88.9 percent currently,” explained the report.
As for Retail REITs, these are likely to benefit from the consolidation trend as tenants transfer to better performing malls closer to transport hubs like Westgate, North Point, Causeway Point and Plaza Singapura. In addition, malls in the suburbs are expected to be more resilient amidst a weak retail environment.
Meanwhile, hospitality REITS could be driven by a forecasted increase in visitor arrivals due to upcoming major events, but competition among hotels could remain stiff.
At the industrial REIT segment, business parks could come under the strongest supply pressure with vacancy rates already at 20 percent.
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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