US Federal Reserve (Fed) Chair Jerome Powell has hinted that a rate cut is not far off, provided inflation consistently moves towards the 2% target. This prospective easing of rates, anticipated possibly in the coming months, is a significant shift after rates were raised more than five percentage points since March 2022.
For savvy investors, Powell’s assertion that “we’re not far from it” regarding the conditions needed for a rate cut could signal an opportunity, especially in interest-sensitive sectors like real estate.
Singapore REITs (S-REITs), in particular, are known to benefit from lower interest rates, which can reduce their borrowing costs and potentially increase their distributions to investors.
This monetary policy shift is anticipated to alleviate some of the financial pressures that S-REITs have faced, offering several benefits:
Reduced Financing Costs
A rate cut by the US Fed would likely lead to lower interest rates globally, including in Singapore. This reduction would decrease the cost of borrowing for S-REITs, which have been grappling with increased financing costs due to the previous rate hikes. Lower interest expenses can directly improve the REITs’ net income and cash flow, potentially allowing for increased distributions to unitholders.
Enhanced Acquisition Opportunities
With the prospect of lower interest rates, S-REITs might find it more feasible to finance new acquisitions or development projects at more attractive rates. This can enable growth strategies focused on accretive acquisitions that enhance the REITs’ portfolio quality and income-generating capacity, ultimately contributing to distribution per unit (DPU) growth.
Improved Valuations
Lower interest rates typically lead to a re-rating of yield-sensitive investments like REITs. As the cost of capital decreases, the present value of future cash flows increases, potentially boosting REIT valuations. Investors may find REITs more attractive in a lower-rate environment, leading to capital appreciation for unitholders.
Increased Investor Attraction
A decrease in interest rates often makes fixed-income investments less appealing, prompting investors to look for higher-yielding alternatives. In this context, S-REITs, with their distribution yields, become more attractive, potentially leading to increased demand for their units and higher unit prices.
Given the potential tailwinds for S-REITs with the anticipated rate cut, we looked at some of the S-REITs that have demonstrated resilience over the last one year with increase in their DPU.
S-REITs That Have Done Well Despite Rate Hikes
· Mapletree Logistics Trust (SGX: M44U) has demonstrated resilience with a slight DPU increase supported by a strong portfolio occupancy rate and positive rental reversions. Its strategic acquisitions and capital recycling activities have contributed to its performance.
· Parkway Life REIT (SGX: C2PU), a healthcare REIT, reported a DPU increase due to acquisitions and higher rental income from Singapore hospitals under new lease agreements. Its moderate gearing and low cost of debt position it well for future growth.
· CapitaLand Ascott Trust (SGX: HMN) has seen significant DPU growth driven by increased revenue and RevPAU reaching pre-COVID levels, underscoring strong recovery in the hospitality sector.
A Silver Lining for S-REITs
The anticipated rate cut by the US Fed could mark a pivotal moment for S-REITs, offering a reprieve from the financial strains of recent times and opening avenues for growth and expansion. This shift in monetary policy holds the promise of lower borrowing costs, enhanced acquisition prospects, improved valuations, and heightened investor interest, setting the stage for a revitalised S-REIT sector. As we look ahead, S-REITs that have demonstrated resilience and strategic foresight amid rising rates are poised to lead the charge, heralding a new chapter of growth and prosperity in the dynamic landscape of real estate investment.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of the company mentioned.
