It’s currently sitting just 25 basis points above 0%. What does that mean for real estate investment trust (REIT) investors who are in Singapore?
Well, the central bank in the Singapore – the Monetary Authority of Singapore (MAS) – uses the Singapore dollar as way of controlling price stability in the city state.
Yet as an open (and globalised) economy, Singapore is not immune from the monetary policy that comes from the Federal Reserve in the US.
So, here’s why low interest rates are great news for REITs and why, even when interest rates do rise, it doesn’t necessarily spell disaster.
Low rates = yield hunt
In an era of uber-low interest rates globally, investors seem to be on a never-ending search for yield. Basically, that means trying to find a return on your money that is higher than inflation.
Why bother putting your hard-earned savings into a bank (where it yields close to 0%) when you could earn an income from putting your cash into a solid dividend-paying stock?
Worldwide, this is a phenomenon that has been playing out ever since the Global Financial Crisis back in 2008.
Heading into negative territory
The eurozone is a perfect example of this. In Europe, the European Central Bank (ECB) now has a negative interest deposit rate of -0.5% – a policy that has been in place since 2014 to counter the eurozone crisis.
In Japan, the Bank of Japan (BOJ) turned to a negative interest rate policy in 2016 in an attempt to get inflation closer to its 2% target.
So, what do it all mean? Effectively, banks in Europe and Japan pay the ECB and BOJ, respectively, to store their reserves at the central bank.
In an effort to get consumers to spend, the upshot has been that large banks in both have been extremely unprofitable over the past decade.
Good for REITs though
However, lower interest rates are good for REITs. That’s down to a number of reasons. First, borrowing (or leverage in REIT-speak) is how REITs can actually grow their portfolios – mainly through acquisitions.
If they can borrow cheaply and at low rates, maybe even refinancing those loans at even lower rates in the future, then they will have less interest expenses to service and more income to distribute.
Second, with lots of money now in negative-yielding bonds – it was a stunning US$13 trillion globally in 2020 – some of that cash will inevitably find its way to more attractive yield investments. This includes REITs.
And even for stocks, such as interest-rate sensitive REITs, would it be that bad? Look what happened in 2016-2018, when US interest rates actually rose for the first time since 2008.
In fact, they reached a range of 2.25-2.5% by early 2019. Did REIT prices in Singapore collapse? No, they did not.
That’s because rising interest rates doesn’t necessarily spell gloom for REITs. It actually indicates that growth in the US is strong. By extension, that tends to be a positive thing for the rest of the world.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be.
In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.