Nov 13, 2023

Cory Diary : Putting in a case for Reit today

Rate Spike

The whole issue of Reits share price being impacted for the past 2 years is due to Rate Spike.The volatility can be seen in Cory portfolio ytd P/L below. The ongoing battle between the yay and nay since the rise of the rate in Year 2022. 

For dividend investor, this is the first time we see significant spike in rate of recent times. Reit contract with different tenants take time to change over the years  therefore the cost of funding cannot be passed down fully to them. Inflation adjustment may also happen on annual basis if is part of contract.

Currently Rate is Peaking in this high rate environment. While rental contract such as Mall Reit could takes 3 years to cover all tenants. This will mean Reit investors will have to absorb the cost of funding differences even with Reit with strong moat. The good news are most Reits are still profitable. We are in interesting time because the irony is those reits with very short term contract will be able to raise their rental cost quickly and are much more nimble to react to rate hike.

Quite a few Reits are much more resilient due to high exposure to local economy in earning S$ and hedging. This shield them significantly while they bid for time. Larger Reits able to realise value in some of their properties with minimal impact to their recurring dpu or even sell in premium to cover the dpu shortfall.

Missing the Trees for the Forest

Interest Rate Trend - Decades is a down trend. While there is many prediction that rate will stay for high and longer, this is not the key factor that impact reits as cost will be passed down to clients in matter of time. However, long term when market stabilized, if that happens, we could see the lowering trend initiated again.

The benefits will be we could see significant rise in reits earning as contract takes time to unwind too and economy could be boosted in lower yield environment again. This is the upper optimism of hope. The fear could be  diving deeper into lower dpu such as the high rate causes recession to the broader economy hence nothing is riskless due to the other spectrum of negativity. 


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Disclaimer: The articles presented in this blog reflect personal opinions and are intended for informational and sharing purposes only. Not responsible of errors. Readers are advised to seek professional guidance when making financial decisions and should take full responsibility for their choices.

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