Jul 25, 2021

Cory Diary : Why is Reits affected by Interest Rate

Often we hear analysts or in forum the perception that Increasing Interest Rate will affects the cost of Reits Loans therefore profitability. However the correlations on table below tells a different story that Reits do generally well in high rate environments .  Hope this settle once and for all, the myth or maybe there is deeper issues within.

Interest Rate Impacts

A well managed Reits will pass the cost to tenant. A too drastic increase within a short period do affect Reits short term as majority of tenancy agreements are still in force but that's not the argument here. Some Reits have build-in rental escalation tied to sales and inflation. Nevertheless, cost is able to pass down to tenant mitigating the impact.

Yield Compression

What we know is that when investing in Reits, we looks for yield therefore it is logical that we compared it to other products to decide is it worth the risk or seek better returns. In the scenario movement of Interest Rate upwards, it can cause Yield compression. This make us less willing to invest in Reits unless the yield improves further therefore lowering the stock price.

Competition Examples

Singapore Saving Bond (SSB ) gives 1.5% annualized (each year) for 10 years. Say the rate doubled to 3% and this allows SSB to give higher rate say 2%. Some people who invest in a Reit logically will switch to SSB considering it is basically riskless to capital. Reit price will naturally falls as there will be more sellers.

In situation of no good alternative, REITs price will generally rises with strong economic and stability as investors are willing to take larger risk. Another comparison though not necessary guaranteed is CPF giving 2.5% and 4% to CPF OA and CPF SA respectively. Though riskless, there are limitations and restrictions.

Not all Reits are the same. Some Reits risks are insane. Be careful of Yield Traps and Pitfalls. However, if a Strong Reit is unfairly sold down, remember to "Koi Durians" ! This differentiate Veterans from the Green as Fundamentally, the business unchanged.

If you are interested to know more about Reits. Try this books !

You could be well on the journey to Financial Freedom like me. But please DYODD.

Articles in this Blog is personal take and educational purposes only. Reader should seek their own professional help when making financial decision and be responsible for their decision.

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