, Singapore

Office REITs unfazed by higher borrowing costs

Yield spreads remain attractive at 3.9%.

Maybank KimEng acknowledges that increasing odds of a rate hike at the December US Federal Reserve meeting and the recent pick up in Singapore Government Bond Yields has lowered the attractiveness of yield sensitive sectors, such as REITs.

Nonetheless, the research house notes that yield spreads remain attractive relative to history and see this pull back for office REITs as a buying opportunity. 

Here's more from Maybank KimEng:

Probability of a rate hike in the upcoming US Federal Reserve meeting on 14 Dec has increased significantly in recent months. The impending rate hike and upwards pressure on the USD has led to a spike in bond yields recently. 10 year bond yields on the Singapore Government Securities (SGS) rose by almost 50bps over the past month to 2.4%. This led to a recent sell off in rate sensitive sectors, such as REITs. While negative, we opine that REITs remain attractive as: 

(1) Yield spreads remain attractive. The 3.9ppt yield spread between S-REITs and the 10-year bond yields remain attractive. This is wider than the average spreads of 3.6ppt over the past three years. 

(2) Interest rate hike manageable. As highlighted in our previous note, office REITs have fairly small exposure to an increase in borrowing costs. CCT/KREIT/Suntec REIT fixed 80%/74%/60% of their borrowings and have just 5%/0%/3% of debt due for refinancing in 2017. Furthermore, 3MSOR has moved by much smaller magnitude than bond yields.    

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