Risks intensify for SREITs as interest rates rise

Organic growth is unlikely next year.

Singapore REITs are unlikely to have significant organic DPU growth on back of projected interest rate hikes in 2015.

According to OSK DMG, limited rental upside means that S-REITs are unlikely to have significant organic DPU growth.

“In terms of inorganic DPU growth, overheated property prices – helped by the current low-interest rate environment – make it challenging to pursue yield-accretive acquisitions. The consensus has forecasted a modest overall DPU growth of 5.1% in 2014 and 2.1% in 2015, which is a far cry from the heydays of 2005-2007,” noted OSK DMG.

Meanwhile, DBS warns that investors should be extra-selective about REIT stocks on back of the US Feds potential interest rate hike next year.

“With risks of rising interest rates by end-2015, investors should focus on REITs with underlying organic growth and AEI potential. In addition, with SREITs fairly valued at the moment and trading on a forward yield of 6.3%, implying a yield spread of c.4% which is in line with historical averages, we remain selective,” noted DBS.

In its Financial Stability Report, the Monetary Authority of Singapore noted the systemic risks that SREITs pose.
“In the low interest rate environment post-GFC, S-REITs have been seen as an attractive investment and an important source of funding for the property sector. There were 30 S-REITs as at end-2013, compared to 16 in 2007. Between 2007 and 2013, the total assets of S-REITs grew 19.3% per annum, far outpacing the 7.0% per annum growth in real estate trusts and funds globally,” the MAS stated. 

The MAS also noted that a stress on the S-REIT sector could directly impact the banking system if S-REITs default on their borrowings. A shock that impacts S-REITs’ ability to pay dividends or put downward pressure on property prices may cause their market capitalisation to fall.