The Impact of Rate Cut on My Singapore REIT Holdings

In my previous post, I shared that unlike Singapore banks, the impact of rate cut on Singapore REITs will vary depending on individual REITs’ debt structures, property types, and geographic exposure.

In light with the recent findings, I decided to briefly evaluate the five REITs that I own in my portfolio: Frasers Centrepoint Trust (SGX: J69U), Mapletree Industrial Trust (SGX: ME8U), Mapletree Logistics Trust‘s (SGX: M44U), Mapletree Pan Asia Commercial Trust (SGX: N2IU), and ParkwayLife REIT (SGX: C2PU).

Borrowing costs: Floating-rate and Refinancing

The direct impact of rate cut on REITs is on their average borrowing costs. How it will move the needle, largely depends on the proportion of floating-rate debt, proportion and prevailing rates of their existing debt that require refinancing.

Among the five REITs, FCT is likely to benefit most from the rate cut. With a higher proportion of floating-rate debt and no immediate refinancing need, it should be able to realise a lower average cost of debt the quickest.

In contrast to FCT, PLife is largely insulated from the direct impact of FED’s rate cuts.

With bulk of its loans in Japan, and its extensive hedging, PLife is largely insulated from the direct impact of FED’s rate cuts. In fact, the rising Japanese interest rates could pose a challenge. However, with only 12% of debt to refinance till 2025, any increase from the current debt cost of 1.35% should be gradual.

The Mapletree REITs present a more nuanced picture.

While their floating-rate debt portion stands to benefit from lower interest rates, the debt or hedges that required refinancing till 2025 are of similar or higher portion. Since these existing debts were issued at lower interest rates, refinancing them now is likely to result in higher borrowing costs.

Demand for REITs: Occupancy and Rental Revision

Borrowing costs is only one side of the equation. On the other side, the lower interest rates are likely to increase economic activities, which in turns might increase the demand for spaces in REITs. This may eventually result in increase in occupancy and improved rental revision.

While interest rates can influence demand, other factors such as government policies, economic conditions, and industry-specific trends also play a significant role. Hence, it is difficult to quantify the precise influence of interest rates on demand.

Can still buy?

Whether or not you should buy REITs now depends on your objective. As a non-trader, I can’t predict short-term price movements. Market sentiment, as always, can reverse in a short moment.

However, if you’re interested in REITs for their potential dividends and long-term growth, then they are worth considering.

Even with recent price increases, these five REITs still offer attractive dividend yields. With the exception of PLife, the other four REITs offer a yield north of 5%, exceeding the returns of Singapore Savings Bonds and T-bills by 2%.

While PLife’s current dividend yield is only 3.8%, its favourable lease renewal arrangement for the Singapore Hospitals provide certainty of its dividends.

At the end of Project Renaissance, which will transform Mount Elizabeth Hospital into a modern and integrated multi-service medical hub by 2025, the Pro Forma dividends per unit is forecasted to be S$0.1826. That translates to an attractive yield of 4.6% based on today’s closing price of $4.01.

Finally, it is always important to remember that investing in REITs carries inherent risks, including fluctuations in property values, interest rate changes, and economic downturns.

For a longer write-up on the five REITs, you can revisit my following posts.

Unlock Your Future Income: 3 Top Singapore REITs to Consider Now

5 New Things that I Learnt about Mapletree Logistics Trust from AGM 2024

My Takeaways from Mapletree Industrial Trust AGM 2024

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