Many REITs investors are wondering REITs are falling like a rock recently. Lets take an example with the latest half year slides of CICT
The slides attached mention that for every 1% increase of interest rate DPU will be impacted by 0.28c. Now this seems a mere 2% for a REIT that distribution 10c+ on average. But as always the devil is in the footnote. Point note 2 state that the above assumption is for their FLOATING RATE LOAN ONLY!!!
What happens when fixed loan expires? They get to be refinanced at a higher rate as well. The 2nd slide shows 81% of the loans are fixed. Imagine in a longer term high interest environment, the fixed loan will expire and refinanced at a higher rate all the time.
So in 3 years time in reality only 40% of the loan will remain “Fixed at low rates” and 60% will be at high rates regardless of fixed or floating.
By rough estimation 20% fixed at low rates loan impacts the REIT by 0.28c. Then in 3 years DPU will be impacted by 3 x 0.28c = 0.84c for every 1% increased. If you assume interest is 5% (very conservative) in 3 years then the full impact will be
(Future Interest Rate – Current Cost of Debt) x 0.84c = 2.184c
There u go the rate impact is an estimated 20% drop in DPU after 3 years assume everything remain unchanged.
$CapLand IntCom T(C38U.SI) is the gold standard for REITs in terms of capital management so one could imagine the impact raising interest rate on lesser REITs.
The good news is REITs will also be fighting this stronger interest headwind by raising their rental rates. REITs with such qualities will be better at weathering the upcoming storm.
I myself a REIT investor will be sitting tight, watch the drama plays out and hopefully get some bargains along the way.
Once again, this article is a guest post and was originally posted on mynest‘s profile on InvestingNote.
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