How will REITs cope as interest rates rise?

REITs didn’t react well to the taper tantrum in 2H13.

REITs’ yield spreads will suffer if the Fed pushes through with the anticipated rate hike in 2015. According to CIMB, the yield spread of the S-REITs could be compressed when the market starts factoring in the impact of rising interest rates.

“We downgrade REITs from overweight to Underweight, with the main worry being how REITs would react to rising interest rate fears. The sector reacted badly in 2H13 when the taper tantrum happened, and we worry that a repeat will happen,” CIMB stated.

CIMB further noted that among the REITs, office REITs are richly priced, while the industrial sector will suffer under new industrial rules, particularly the smaller ones who cannot shuffle tenants around.

Here’s more from CIMB:
The sub-sector that we are most bullish on for 2015 is the hotels sector. We view the hospitality sector in 2014 as being hit by large new supplies, just as Chinese tourists numbers slowed, Indonesian spending came off and the popularity of SE Asian tour packages switched off with Thailand‟s unrest.

We think these factors are all fading and 2015‟s supply will not be as big. We like CDL-HT and OUE-HT the best. Other names that we like are mostly for their ability to derive organic DPU growth from rental reversions of their key assets, including FCT (Changi City Point) and MINT (new industrial spaces completed).