S-REITs to stay resilient should interest rate spike: MAS

Median ICR will remain at 4 times after raising interest rates by 3%.

Singapore REITs are definitely on the right track and have enough profits to spare even with the threat of rising interest rates, the latest report by Monetary Authority of Singapore revealed.

The central bank said while the median interest CR of S-REITs is strong at 5.4 times, a potential rise in global interest rates would increase their interest burden.

"Nevertheless, S-REITs appear well-placed to withstand interest rate increases. To hedge against these risks, S-REITs have used derivatives to convert part of their floating-rate borrowings to fixed rates. Stress tests on S-REITs show that their median ICR remains at a healthy 4.0 times after hedging even when interest rates rise by 3 percentage points," MAS said.

However, the institution mentioned that S-REITs that are exposed to the domestic office, industrial, and retail sectors could face some near term challenges as the martket absorbs the supply of new space coming on stream between 2016 to 2018.

"While pre-commitments for major upcoming Office and Industrial developments appear to be on track, overall demand for rental space could soften alongside slowing domestic economic activity. This could put some pressure on occupancy rates and rents in the next few years as completions peak," MAS explained.

With this, weaker rental incomes could in turn adversely affect their ability to meet interest payments and sustain distributions to investors.

Using a stress test, MAS assessed S-REITs resilience against potential combined funding and income shocks, taking in account vacancy rates and reduction in rents.

"Under a severe stress scenario where EBITDA decline by 35% and interest rates increase by 3 percentage points, the median ICRs for these Office, Industrial and Retail S-REITs remain healthy at around 1.9, 2.4 and 1.8 times respectively. Indeed, the ICRs of all such S-REITs would remain above one under the stress scenario," MAS noted.