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REITs Opportunities Under Rising Rate Environment



REITs has been outperforming the market in the past decade and investors have enjoyed many years of consistent dividend payouts. However, in the recent months, REITs have suffered huge price corrections especially after the announcement of 75 basis rate hike by FED on 21 September.


Are REITs still a good long-term asset for investors seeking for passive income?


First, we look at how rising interest rate is impacting REITs.

In general, REITs use leverage to own properties, a higher financing cost because of rising interest rate will potentially reduce the distributable income to investors. Besides, investors will start to compare other yielding assets with REITs, for example, a 5% yield from REITs might no longer be attractive for investors as compared to the risk-free rate like UOB fixed deposit rate and the Singapore Government 5-year Bond which hit 2.8% and 3.48% recently.


How did REITs perform during rising interest rate environment?

Historically, REITs have performed well during periods of rising long-term interest rates.


Source: Lion Global Investors, Bloomberg

During the 7 periods when Monetary Authority of Singapore (MAS) increased the government bond yield, S-REITs have outperformed the markets 3 times. There was not a strong negative correlation between rising interest rate and REITs’ returns.


REITs with higher risk during rising interest rates

REITs with higher gearing are likely to be impacted more, for example, Lippo Malls Indonesia Retail Trust (SGX: D5IU) and ESR-REIT (SGX: J91U) with gearing ratios of 42% and 40% respectively are likely to be impacted during this period.



Are there still any opportunities in REITs?

REITs with higher % of loans under fixed rate may have a bigger buffer from the rising interest rate.


Besides, REITs which are paying higher yield might have a greater buffer as compared to REITs with lower yield.


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