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Impact Of Higher Interest Rates on Property and REITs

Impact Of Higher Interest Rates on Property and REITs

The US Federal Reserve just announced the second Interest Rate Hike in 2018. And it hints at least another 2 more hikes for the later part of the year.

 

Jerome Powell us fed chairman

With the increase of interest rates by 25 basis points from the FOMC meeting yesterday, the current federal funds rate is now at 2%.

The Federal Reserve signaled it will raise rates to 2.5 percent in 2018, 3.0 percent in 2019, and 3.5 percent in 2020.

Singapore manages an exchange rate based monetary policy, pegging the Singapore Dollar to a basket of currencies, which the US Dollar is a primary component. This explains why US interest rates have a strong positive correlation with Singapore’s interest rates as seen in the chart below:

correlation us fed interest rate and singapore SIBOR   Source:  www.mortgagewise.sg

What does this mean for Real Estate Investment Trusts? (REITs)

As REITs require borrowing to develop properties, a rise in interest rates would essentially mean a rise in the cost of borrowing. A higher cost of borrowing would mean that REITs are taking a higher risk of default.

interest rates hike us

The FTSE S-REIT Index has also began to show a sell down since the beginning of the year, when there was the first Fed rate hike of 2018. The FTSE S-REIT consists of 31 SGX-listed REITs.

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