REITs grapple with intensifying refinancing risks as interest rates rise

The end of cheap financing is here.

Higher refinancing costs will take a chunk out of REITs’ distributable incomes, which in turn will dent their attractiveness to investors.

Analysts warn that REITs will have to deal with intensifying refinancing risks on back of the anticipated Fed rate hike, which could come sooner rather than later.

A report by DBS warned that the era of cheap financing which S-REITs have been enjoying is drawing to a close, which will cause refinancing costs to increase when S-REITs rollover their debt starting 2015.

“We estimate a 1% hike in the refinancing rate on debt renewals in 2015 and 2016 would reduce distributions by an average of 2.0% (ranging from 0.0% to 5.6%). This suggests average FY16F yield might dip as much as 15 bps to 6.05%, and there would be only marginal growth this year. As refinancing risks rise, we may see limited upside for S-REIT unit prices from current levels,” stated DBS.

Meanwhile, Nicholas Teo of CMC Markets noted that yields on Singapore’s 10-year government note climbed by 10 base points to a new high on Monday, which has laid renewed pressure on SREITs, a proxy yield play in the local market.

“Another factor that may weigh on local REITs is the notion that they remain ‘heavily owned’. Their popularity over the past decade, combined with local investors’ thirst for yield, have seen this sector outperforming the market and growing in size from almost nothing in 2001, to a current market capitalisation of roughly S$60-70 billion. With strong headwinds coming from an earlier Fed rate hike, local REITs may find it a challenge to match their collective past performances,” he noted.