Rate hikes put heat on REITs

Nearly 80% of REITs are currently hedged, with only a minimal 9% of debts expiring this year.

Rate hikes are threatening yield instruments, but Singapore REITs are poised to mitigate the risks, RHB Research analyst Vijay Natajaran said.

According to a report, S-REITs are currently trading at a 330bps spread to the Monetary Authority of Singapore (MAS) 10-year bond yield. By comparison, the 10-year average mean spread stands at 410bps – excluding the Global Financial Crisis (GFC) peaks.

The analyst said S-REITs are in an advantageous position due to improving economic conditions have resulted in a better demand outlook for REITs, which should filter down to DPU growth, and the oversupply threat, which weighed across S-REITs over last few years, are beginning to fade away. "REITs are also expected to deliver inorganic growth from recent acquisitions, and balance sheet positions remain strong," Natajaran said.

"Thus, we continue to believe that S-REITs are well-positioned to capture this uptrend and outperform their peers," he added. "Overall, we expect the S-REIT stocks under our coverage to deliver DPU growth of 2% for 2018, with the hospitality (4% YoY DPU growth) and industrial (3% YoY DPU growth) sub-sectors being key contributors."

Based on their analysis, Natajaran also noted that most of the REITs are well-prepared for the current rate hike in this cycle when compared to the past. "On an average, close to 80% of REITs are currently hedged, with only a minimal 9% of debts expiring this year. S-REITs’ average gearing also currently stands at the 35% level, which is well below the maximum allowable threshold of 45%. Thus, we do not expect REIT interest cost expenses to rise up drastically in the near term," he added.

Moreover, REIT management teams across all sectors expressed cautious optimism on the outlook for 2018.

Demand growth was also seen across all sub-segments. "Most of the REITs also highlighted that borrowing costs have inched up, with 20-50bps hike seen over the last two quarters," Natajaran said. 

With cap rate compression still in play in Singapore and Australia, many REITs also indicated their plans to explore new geographies including the US and Europe. "On the capital structure front, more REITs are exploring the addition of perpetual securities as a mode of fundraising – this is in order to avoid breaching gearing thresholds. Additionally, many REITs have also activated dividend reinvestment programme (DRP) schemes to boost their equity bases," he concluded.