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While the rise in the Singapore 10-year government bond and three-month Singapore Interbank Offered Rate (SIBOR) have compressed the yield spreads of REITs, most them are still trading above their historical averages, revealed Credit Suisse.
Notably, the weakness in the Singapore dollar saw the Singapore 10-year government bond and three-month Sibor increase by 25 basis points to 2.86 percent and 1.14 percent respectively, over the last 1.5 months, it said in a report.
Compared to historical yield spreads, the Swiss financial institution said CDL Hospitality Trust, Keppel REIT and CapitaLand Commercial Trust offered the biggest buffer, while the yield spreads of Ascott Residence Trust, Mapletree Commercial Trust and Suntec are currently below their historical averages.
“Most REIT yields are 1 standard deviation above historical averages with CMT as the highest above amongst retail REITs, KREIT in office, AREIT in industrial and CDL HT in hospitality,” it said.
In fact, 61 to 99 percent of REIT borrowing cost have already been fixed and will be largely protected from the recent rise in SIBOR.
“Based on the current gearing levels and fixed debt, KREIT, Suntec and OUEHT would be the most vulnerable to rising borrowing costs—we estimate that a 100 basis point increase lowers DPU by 3.4–4.2 percent. CT, MINT and KDC REIT would be the least impacted,” said Credit Suisse.
“Current valuations suggest that the REITs are pricing in some expectations of higher rates and our preference is for the suburban retail REITs, CMT and FCT. This is followed by the industrial REITs, where we like KDCREIT, MINT and AREIT,” it added.
Nikki De Guzman, Editor at CommercialGuru, wrote this story. To contact her about this or other stories email nikki@propertyguru.com.sg.
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