The age of easy money is over for SREITs

It will be tough to make good acquisitions.

Extremely low interest rates have made it easy for Singapore REITs to use debt in order to fund acquisitions. But now, the double whammy of rising interest rates and new leverage ratio limits means that the age of easy money is over for REITs.

A report by OCBC said that tighter debt headroom will stifle DPU growth opportunities in the future as REITs will be unable to fully fund their acquisitions with debt.

"We foresee more equity financing for future acquisitions. Given the dilutive and costlier nature of equity, we believe REITs would find it harder to make DPU accretive acquisitions. This would limit DPU growth ahead," OCBC said.

The report also noted that this situation could be heightened by a scenario of weakening real estate capital values, which is likely once a liftoff in interest rates occur.

"The higher borrowing costs would dampen investors’ purchasing power. A higher discount rate may also be adopted by valuers. Ultimately, whether capital values do decline during a rising interest rate environment depends on the health of the economy. While the U.S. economy is improving, the global economy is still fraught with vagaries," said OCBC.

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