Which REITs will benefit most from rate cuts?

Experts expect two 25bps cuts in 2024.

Expected interest rate cuts in September are poised to benefit real estate investment trusts (REITs) because of their close correlation, though experts suggest the impact will be more immediate for those with fewer loans hedged to fixed rates.

“The protracted rate cuts will have an immediate impact on floating rates for REITs, with a more pronounced effect on those that had more than 20% of their loans left unhedged,” DBS experts said.

Among S-REITs, DBS identified CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) as the likely top beneficiaries of the rate reduction, alongside Suntec REIT (SUN), OUE Commercial REIT (OUECT), and Lendlease Global Commercial REIT (LREIT), which have only 50-60% of their loan books hedged to fixed rates. 

DBS also noted that S-REITs could see their average financing costs decrease by 30 basis points to 3.6%, down from the current average of 3.9%, assuming the three-month swap rate falls by 1 percentage point.

In terms of sectors, DBS stated that retail has the greatest potential to benefit from the interest rate cuts heading into Q4 2024 to 2025, followed by industrial, hotels, and office, citing their income resilience.

DBS added that growth momentum for retail, office, and warehouse sectors will remain robust in the second half of 2024. 

However, DBS cautioned that investors should be careful when dealing with hotels, as demand is expected to soften in 2H24 due to increased price sensitivity among hoteliers, driven by a slower-than-expected recovery in China demand.