Fear of rising rates
The key reason that is causing REIT prices to fall is the anticipation of the rise in interest rates. REITs take loans in order to acquire capital intensive properties, just like individuals do.
Higher interest rates mean that the financing cost is going to go up and that reduces the profits and dividends. With the pending rate hikes, it is logical that the REIT prices have to be adjusted downwards to incorporate the interest rate risk.
Hence, the current factors driving REIT prices (as with most other stocks) are not fundamentals but macro.
Improved fundamentals shadowed
In fact fundamentals have been improving – REITs have increased their dividends in 2021 as FTSE Straits Times REIT Index (anotherREIT index) reported a 16.5% dividend growth.
Yes, 2020 was a low base due to Covid and dividends have yet to recover to pre-Covid levels generally. But there was recovery.
Most investors buy REITs for the dividends and hence the key to evaluating REITs is in their ability to grow the dividends overtime or at least maintain it. In this case it is about the ability of the REITs to continue giving undiminished dividends despite increase in interest rates.
Impact of Interest Rate Hikes (Eg. Ascendas REIT)
Let’s look at the impact of interest rate hikes to REIT’s dividend distribution, using Ascendas REIT as an example.
In their FY21 presentation,Ascendas REITmentioned a 1% increase in interest rate would lower their distribution per unit (DPU) by 0.29c. That is just a 2% decline based on FY21 DPU of 15.258. Hardly an impact.
Here are some REITs’ dividend yields (as of 14 Mar) and their 5 y average yields:
- Capitaland Integrated Commercial Trust 5.3% vs 4.96%
- Ascendas REIT 5.7% vs 4.25%
- Mapletree Commercial Trust 5.1% vs 4.68%
- Mapletree Logistics Trust 4.8% vs 4.72%
- Mapletree Industrial Trust 5.2% vs 4.8%
Should you buy Singapore REITs now?
The current yields are generally higher than the historical averages and that means that REITs are attractive buys now, especially thedividendsaren’t going to be impacted much by rate hikes.
But one should not buy with an expectation of the price going up. Instead, the yields should be at a level you’ll be happy with. Else don’t buy.
The above conclusion only applies if the inflation doesn’t worsen. If we have a runaway inflation problem, the interest rate will need to be raised much more than what is expected currently. That would cause REIT prices to go down further coupled with a bigger reduction in dividends.$ASCENDAS REAL ESTATE INV TRUST(A17U.SI)$
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