S-REITs in a Rising Interest Rate Environment

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  • In the year-to-date, the SGX S-REIT Index has generated a 15.5% price gain and 21.2% total return (inclusive of dividends), compared to the benchmark STI’s 15.6% price gain and 19.0% total return. Singapore’s 3-month SIBOR has gained 16.2% in the same period.
  • In theory, a rise in interest rates will lead to an increase in borrowing costs, which impacts the profitability of REITs and their ability to make acquisitions. However, gradual rate increases are also often associated with improving economic growth, which indirectly boosts REITs’ earnings.
  • The SGX S-REIT Index maintains a median gearing ratio of 34.0%, below the 45.0% limit. In terms of valuation, yield spreads between S-REITs and 10-year government bonds are at 385bps, 39bps above the long term average of 346bps.




In the year-to-date, the SGX S-REIT Index has generated a 15.5% price gain and 21.2% total return (inclusive of dividends), compared to the benchmark STI’s 15.6% price gain and 19.0% total return.

As illustrated below, the performance of the SGX S-REIT Index surpassed the benchmark STI in August 2017 on the back of positive sentiment in the Singapore property market.

In same period, the 3-month Singapore Interbank Offer Rate (SIBOR), a benchmark interest rate in Singapore, has gained 16.2% following two interest rate hikes by the Fed in March and June.

STI, REIT and SIBORRising Interest Rates – Good and Bad for REITs

In theory, a rise in interest rates will lead to an increase in borrowing costs, which impacts the profitability of REITs and their ability to make acquisitions.

As REITs rely on debt to finance their property acquisitions, they will incur higher borrowing costs in the event of higher interest rates.

This will result in lower cash flow for shareholder dividend payouts, hence to maintain the same yields, REITs will face downward price pressures.

However, as mentioned in an earlier market update, gradual interest rate increases are often associated with improving economic growth.

As the economic outlook improves, rents, vacancy rates and other key operating metrics important to REIT cash flows also tend to improve.

Thus, interest rate hikes may be indirectly associated with higher REIT earnings, which may help to offset increased borrowing costs.

It should be noted that while REITs are sensitive to rising interest rates, REITs are managed by managers who have a say in navigating the different interest rate environments.

Furthermore, sensitivity of different REITs will also vary depending on the amount of leverage taken on by the REIT amongst other factors.


REITs’ Median Gearing Ratio Below Global Peers and 45% Limit

In January 2016, the gearing ratio or leverage limit for REITs, which takes into account the proportion of debt versus assets, was increased from 35% to 45% of the REIT’s total assets.

Despite the increased limit, SGX S-REITs continue to maintain lower gearing ratios versus global peers (as discussed in a previous market update).

The SGX S-REIT Index maintains an median gearing ratio of 34% where the highest ratios are in Diversified REITs, and the lowest are in the Specialised REITs sub-sector.

Published in Nov 2016, a stress test by the Monetary Authority of Singapore (MAS) assessed the resilience of REITs in a situation where their EBITDA fell 35% while interest rates rose three percentage points.

The report noted that REITs listed here have sufficient earnings cushion to absorb the impact of higher interest rates even in challenging conditions.

Median gearing ratio of REIT sectors
Median gearing ratio of REIT sectors

Note that REITs are also diversified by the type of property that they invest in, such as retail shopping malls office towers, industrial parks and logistic parks.

Singapore REITs are also diversified by geographies, offering investors a choice of Singapore-based properties, overseas-based properties in addition to REITs that invest in property both in Singapore and overseas.

Hence, investors should consider multiple factors beyond gearing ratios when investing in REITs.

Yield Spreads Above Long Term Average

Yield spreads between S-REITs and 10 year government bonds stand at 385bps, 39bps above the long term average of 346bps.

According to a market commentary by NAREIT (National Association of Real Estate Investment Trusts),

yield spreads – defined as the difference between the REITs’ dividend yield and the market yield on 10-year government securities – can be a more useful investment metric than absolute yields, particularly for investors interested in capital appreciation as well as income.

Based on historical data on US REITs, the commentary concluded that in cases where the yield spread has been unusually high in the past (relative to its long term average), that situation has generally signalled that REIT total returns in the future relative to the broad stock market would be abnormally strong over the next several years.

MAS 10Y govt bond yield, REIT yield and REIT yield spreads
MAS 10Y govt bond yield, REIT yield and REIT yield spreads



Recent Performances

As detailed in the table below, all 31 of the REITs and the six Stapled Trusts have generated positive returns in the 2017 year through to 17 October, with total returns ranging from 4.3% for Fortune REIT (in SGD terms) to 34.9% for CDL Hospitality Trusts.

Name SGX Code Market Cap S$M Last Price*  Price Change YTD % Total Return YTD % Gearing Ratio % Dvd Ind Yld %
Diversified REITs
Suntec REIT T82U 5,087 1.920 16.4 21.3 34.7 5.2
Mapletree Greater China Commercial Trust RW0U 3,346 1.190 25.3 29.7 39.4 6.2
Viva Industrial Trust T8B 926 0.955 26.5 33.8 38.7 7.6
Soilbuild Business Space REIT SV3U 725 0.690 7.8 15.2 37.5 8.6
Health Care REITs
Parkway Life REIT C2PU 1,670 2.760 16.9 21.5 37.3 4.6
First REIT AW9U 1,070 1.375 8.7 14.0 30.8 6.2
Hotel & Resort REITs
CDL Hospitality Trusts J85 1,953 1.630 21.6 34.9 38.6 5.9
OUE Hospitality Trust SK7 1,452 0.805 22.0 28.7 38.0 6.3
Frasers Hospitality Trust ACV 1,421 0.770 18.5 22.7 34.0 6.3
Far East Hospitality Trust Q5T 1,297 0.700 16.7 22.5 33.0 5.9
Ascendas Hospitality Trust Q1P 964 0.855 21.3 26.1 32.7 6.6
Industrial REITs
Ascendas REIT A17U 7,907 2.740 20.7 24.6 33.3 6.6
Mapletree Logistics Trust M44U 3,755 1.230 20.6 29.2 38.9 6.1
Mapletree Industrial Trust ME8U 3,416 1.895 15.2 20.9 29.8 6.1
Frasers Logistics & Industrial Trust BUOU 1,693 1.120 21.1 27.5 27.8 6.9
AIMS AMP Capital Industrial REIT O5RU 918 1.435 9.5 16.1 36.2 7.5
Cache Logistics Trust K2LU 890 0.835 3.1 14.1 43.2 8.7
ESR-REIT J91U 759 0.580 7.4 13.1 36.5 7.0
EC World REIT BWCU 611 0.780 2.6 8.8 26.9 7.7***
Sabana Shariah Comp Ind REIT M1GU 490 0.465 22.4 29.9 36.8 8.1
Office REITs
Capitaland Commercial Trust C61U 5,274 1.660 12.2 22.2 28.4 5.6
Keppel REIT K71U 4,009 1.195 17.2 22.0 33.3 4.8
Frasers Commercial Trust ND8U 1,128 1.400 11.1 17.4 35.8 7.1
OUE Commercial REIT TS0U 1,102 0.715 2.9 10.2 34.3 6.8
Manulife US REIT** BTOU 968 0.900 2.3 19.4 33.6 7.2
IREIT Global UD1U 475 0.760 6.3 15.1 41.2 8.1
Retail REITs
Capitaland Mall Trust C38U 7,269 2.050 8.8 13.4 31.3 5.4
Mapletree Commercial Trust N2IU 4,460 1.550 11.1 16.0 36.4 5.7
Fortune REIT** F25U 3,035 9.140 -1.2 4.3 30.0 5.6
SPH REIT SK6U 2,607 1.020 7.4 13.5 25.3 5.4
Frasers Centrepoint Trust J69U 2,020 2.190 15.3 20.3 30.0 5.4
Starhill Global REIT P40U 1,690 0.775 4.7 9.8 35.2 6.4
Capitaland Retail China Trust AU8U 1,520 1.685 23.0 31.4 34.9 6.0
Lippo Malls Indonesia Retail Trust D5IU 1,228 0.435 17.6 25.3 30.2 8.1
BHG Retail REIT BMGU 374 0.750 14.5 23.3 27.5 6.6
Residential REITs
Ascott Residence Trust A68U 2,609 1.215 7.5 19.7 31.1 6.4
Specialized REITs
Keppel DC REIT AJBU 1,516 1.345 13.5 19.4 32.9 4.8

Source: Bloomberg & SGX StockFacts (data as of 17 October 2017).
*Last price of companies are denoted in their respective trading currencies
CDL Hospitality Trust, OUE Hospitality Trust, Frasers Hospitality Trust, Far East Hospitality Trusts, Ascendas Hospitality Trust and Viva Industrial Trust are Stapled Trusts. Table excludes Saizen REIT
**Note Fortune REIT is traded in HKD and Manulife US REIT is traded in USD. Except for Last Price, SGD equivalents are shown in table. Market Capitalisation calculation of Manulife US REIT includes Rights units, according to Bloomberg.
***Based on annualised estimations

This article first appeared on SGX Research.

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