Inflation is unmistakably on the rise around the world.
The US Labour Department said that consumer prices jumped by 7.5% in January, the highest level in the past four decades.
The effect can be felt in Singapore too. We’ve seen a core inflation rate of 2.4%, the highest in more than nine years in January.
As a result, the US Federal Reserve is pledging to raise interest rates.
Rising interest rates causing REITs to underperform
A common understanding is that rising interest rates will cause REITs to underperform.
Singapore’s REIT sector has not escaped unscathed.
Almost 50% of the 44 Singapore REITs were trading close to their 52-week lows in January.
Frasers Centrepoint Trust (SGX: J69U), a retail REIT that owns suburban shopping malls, has fallen close to its year-low of S$2.22.
And Mapletree Logistics Trust (SGX: M44U), a reputable logistics-focused REIT, has also declined to trade close to its 52-week low of S$1.68.
Manulife US REIT (SGX: BTOU), a commercial REIT that owns a portfolio of US properties, is trading close to its year-low of US$0.63.
The reasons are clear.
Due to its heavy reliance on debt, higher interest rates will have a negative impact on financing costs and may crimp a REIT’s overall ability to pay its distribution per unit.
The situation has not improved in February, either.
The recent outbreak of war between Russia and Ukraine has led to new uncertainties as countries around the world scramble to levy sanctions on the former. It is also increasing inflation expectations across the globe.
Unsurprisingly, sentiment remains bearish for REITs, with many of them continuing to trade close to their 52-week lows.
REIT investors may be worried over the sustainability of the DPU and whether REITs can effectively refinance their debt at attractive rates as they come due.
It’s a legitimate concern as REIT investors are normally income-seeking investors that rely on REITs as a dependable source of passive income.
Is it time to Buy or Sell Singapore REITs?
So, the question now is, should you sell off your REITs now, or perhaps even find opportunities to buy more?
We believe that it is time to buy into good, solid REITs.
There are some REITs out there who will be less affected by rising interest rates.
Take Parkway Life REIT (SGX: C2PU) as an example.
The Federal Funds rate increased from less than 1% at the start of 2016 to close to 2.5% by mid-2019, a rapid increase by any measure.
Yet, the healthcare REIT has managed to increase its core DPU during this period.
What’s more, Parkway Life REIT has also managed to keep its all-in debt cost extremely low at just 0.52% as of 31 December 2021.
The presence of quality, recession-resistant assets coupled with effective debt management are attributes of a strong REIT.
Industrial REITs have also been fairly resilient.
Throughout the pandemic, most of them have reported resilient rental income and healthy portfolio occupancy.
Ascendas REIT (SGX: A17U), or A-REIT, is no exception. The REIT, which boasts a broad and well-diversified tenant base, recently reported a strong set of numbers.
For an income-seeking investor, a REIT that can continue to deliver during good and bad times can provide much needed peace of mind.
Get Smart: How to look for Winning REITs for your portfolio
If you are wondering what you should do with the REITs in your portfolio, you’re in luck.
In our coming FREE webinar, join me and Portfolio Manager Royston Yang as we explore whether REITs can continue to make viable, attractive investments for an income-focused investor.
Our upcoming webinar will cast a spotlight on what REITs are going through and whether they remain a viable asset class for the long term.
This webinar is free and will be useful to investors of all levels.
You’ll walk away with a new understanding of REITs, and potentially an eye for new opportunities in this market.
Webinar spots are limited, so register now and save a seat for yourself!