I’ve personally owned a few reits in my portfolio so I have a natural vested interest in what was going on in the reits environment. Given that we are now fresh into the new year and with interest rates finally (I mean FINALLY) increasing, I think it’s important that we are forward looking in trying to analyze a few factors that might impact our selected reits.
Most Reits generally thrive on low interest rate environment due to the leverage they have on their books. When interest rate rises, their costs of capital would naturally have to increase because both the costs of borrowings and cost of equity would go up so issuing either bonds or rights would become more expensive than before.
I’ve heard many people citing the rising interest rate environment as bad for reits but if you think about it, it generally applies to most companies that leverage and the only way we are able to know the true impact is by going a little more in-depth about the capital structure of the company.
The sensitivity analysis is taking into account the respective reits’ profile on the debt expiry, fixed loans rate and current costs of debt rate when computing the overall impact to the distribution income. The table above is using 1% (100 basis points) increase in interest rates.
Again using my favourite Reits, FCT as an example, the impact to the distributional income for a 1% increase in rates is marginally low at -1.1% and you can see from their capital structure why it is so. Of course, there are other factors which might come into play such as occupancy rates, rental reversion, lease expiry but you can see that for as long as they keep the rate increase marginally slow, the impact to the distribution will not be immediate and huge. When markets overreact to external news like this and bring the share price down, I’d knew it could become an opportunity for me.
There’s so much variable factors in play for reits than many investors would have think of and it’s interesting to see how these matured market would play out this year, given the obvious macro-economic slowdown and a rising interest rate.
Are you still eyeing Reits in this current environment?
And some REITs have borrowing in currencies where borrowing costs probably won't increase… e.g. yen?
Hi owq
It's usually a natural hedge against their assets, so yeah a lot of reits are borrowing and reporting in the same currency.
REIT will probably be flat this year for the US market. With so many uncertainty, I think there won't be only 1 or 2 rate increase and 0.25 basic point which will not literally nothing to REIT's bottom line, but the uncertainty doesn't help the stock price as Wall street get spooked very easily.
I might add more REITs. REITs isn't my favorite as the taxes structure is not favorable for retirees. Dividends from REITs are taxed at higher percentage.
but I'm focusing on Energy. Iran is talking bold on increase supplies. they are after all the 2nd largest oil producer, their talk will have weight.
Hi Vivianne
I am actually buying reits which has a EUR exposure since they are still implementing the QE. US reits will likely underperform in the rising rate environment so I don't think it's a good risk reward play like you said.
Hi,
REITs like the Suntec and Sabana are still quite safe as their book value is much higher than their share price. For the Suntec, it is about $2 while the share price is around $1.575 only; for the Sabana, the book value is around $1 but the share price is only $0.715. So my conclusion: buy low when the yield is high around 6-8% and yet the book value can hold. Imagine what will happen to Singapore economy when the Suntec is bankrupt? Do you think Singapore can still make it?
Moreover at this low price, who knows? May be some funds will just take over since they are buying at a discount and still have rental coming in at this volatile time.
Just my 2 cents' worth and thanks for reading!
Hi Anonymous
That's a very simplistic way of looking at it to be honest but I wouldn't count on that. Book value can get devalued during poor economy times so your price to book value can shoot up if that happens.
You asked what can happen to Singapore economy if Suntec is banktrupt. The same question I can ask about banks, telcos, commodities, manufacturing and in fact a lot more companies. But as long as Lehman can collapse, anything can collapse. Don't count your money on it.
With every passing time there are whole new range of services and facilities seen coming up, outsource payroll costs is one reputed one with years of knowledge at the back. The importance of this online payroll services cannot be ignored as they are paving way for more benefits and help for working professionals. Make sure you get in touch with any of such service provider.
Hi B,
Most REITs have taken measures against Fed Interest Rate Hike.
eToro is the ultimate forex trading platform for beginning and pro traders.