You’ve been warned: Massive interest rate hike looms over S-REITs

Brace yourself for costlier rents.

The country’s REITs are in for a much-needed reality check. A previously unforeseen interest rate hike looming on the horizon for S-REITs, a report by OCBC revealed today.

According to the report, the government’s efforts to suppress long-term borrowing may cause interest rates to increase more quickly than previously expected.

“Even the recent forecasts by the Fed officials point to a possibility that the interest rates may rise faster than previously expected. Given these developments, we now make a conscious effort to select the S-REITs that are likely able to withstand any potential correction better and outperform the rest,” noted OCBC.

Here’s more from the report:

The S-REITs sector has rallied 7.3% and outperformed STI by 4ppt YTD on US Fed Chair Janet Yellen’s forward guidance that interest rates are likely to stay low “for a considerable time”.

However, against this backdrop, we note that the Fed will continue to cut the bond purchases meant to suppress the long-term borrowing costs low, keeping it on track to end the stimulus programme late this year.

Our findings show that the fundamentals of S-REITs have generally remained sound, and S-REITs continue to benefit from their past investments and higher secured rentals within their existing portfolios.

On a relative basis, the office REIT subsector outlook looks the rosiest, as the uptrend in office rents is likely to be sustained amid strong leasing activity, low vacancy and limited supply in the near term.

This is followed by retail REITs, which are poised to reap the returns of their AEIs and the positive operating landscape. For FY15, we note that Suntec REIT and CapitaCommercial Trust are expected to experience one of the fastest increases in DPU, according to Bloomberg consensus forecasts.