Rate Hikes Pressure REIT Performance
The Federal Reserve’s rapid increase in the Federal Funds Rate (FFR), from near-zero levels in late 2021 to a range of 5.25% to 5.5% by the end of 2024, has weighed heavily on REITs. The FTSE ST REIT Index has dropped 8.2% year-to-date, reflecting the strain.
REITs faced three key challenges due to rising rates: declining trading prices, shrinking distribution per unit (DPU) yields, and falling capital values. The higher cost of borrowing has chipped away at distributable income, while increased discount rates have reduced the value of investment properties.
U.S.-based REITs, such as Manulife US REIT and Keppel Pacific Oak US REIT, have been particularly hard-hit, with some suspending or slashing DPUs. Transactions in the U.S. property market have slowed significantly, reflecting a broader trend of caution among investors.
Inflation, Trump Policies Add Pressure
DBS Group Research has flagged a more hawkish inflation outlook, coupled with limited interest rate cuts in the pipeline. Trump’s proposed tariffs on Chinese imports and the broader global economy could exacerbate the situation.
“Trump’s proposed tax cuts, tariffs, and deportation of millions of illegal immigrants are inflationary,” the bank stated in its 2025 outlook. Analysts now expect only three rate cuts through the end of 2025, down from seven previously anticipated.
Trade war fears loom large, with Trump’s re-election sparking concerns of a 60% tariff on Chinese goods. REITs with significant exposure to China and Hong Kong, such as Mapletree Logistics Trust (MLT) and CapitaLand China Trust (CLCT), may bear the brunt.
MAS Adjusts Regulations
In Singapore, the Monetary Authority of Singapore (MAS) introduced new rules to streamline REIT leverage and interest coverage ratio (ICR) requirements. Effective immediately, REITs must maintain a minimum ICR of 1.5 times and an aggregate leverage limit of 50%. Additional disclosure requirements for REIT managers will come into effect in 2025.
MAS’s adjustments aim to offer REIT managers greater flexibility while ensuring prudent financial management. However, smaller REITs or those with weaker balance sheets could face challenges in adhering to these new standards.
Investor Trends Favor Singapore Assets
Despite the headwinds, investor demand for Singapore-based assets remains robust. CapitaLand Integrated Commercial Trust (CICT) and Keppel DC REIT (KDC REIT) raised significant funds this year, reflecting strong interest in high-quality local assets. CICT’s $1.1 billion fundraising, buoyed by its acquisition of a stake in Ion Orchard, highlighted this trend.
Analysts expect downtown rents to outperform suburban markets, with properties like Ion Orchard attracting ultra-high-net-worth individuals and tourists alike.
Outlook: Navigating Uncertainty
While 2024 presented significant challenges for REITs, some opportunities remain. Analysts predict that pre-emptive equity fundraising, a significant hurdle this year, may ease in 2025, providing more stability.
However, much depends on macroeconomic conditions, including the trajectory of interest rates, inflation, and potential trade disruptions under Trump’s second term. As REITs adjust to these realities, their appeal to investors—and their ability to remain “bankers’ best friends”—remains uncertain.
For now, all eyes are on global policy shifts and their ripple effects on the REIT market heading into 2025.
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