Experts say

Impact of interest rate hikes

Trading on the New York Stock Exchange goes on as a TV set shows Fed chairman Janet Yellen giving a speech. Analysts in Singapore are of the opinion that as long as the US interest rate trajectory is slow and gradual, S-Reits will continue to do reas
Trading on the New York Stock Exchange goes on as a TV set shows Fed chairman Janet Yellen giving a speech. Analysts in Singapore are of the opinion that as long as the US interest rate trajectory is slow and gradual, S-Reits will continue to do reasonably well.PHOTO: BLOOMBERG

Mr Jeffrey Lee of Phillip Capital Management believes the next rate hike by the US Federal Reserve - the timing of which is being keenly watched - may be more benign to Reits than some fear: "The emphasis has been on gradualism in rate hikes, in US Fed statements. Rate hikes reflect confidence in the US, and probably the global economy's recovery and a belief that it will be able to withstand a gradual increase in interest rates going forward.

"These (rate hikes) would trickle down to rental growth for Reit properties. Generally, in the past two rate hike cycles starting in 1999 and 2004, emerging markets have seen uptrends.

"Most Asia-Pacific Reits have manageable debt levels and have hedged or fixed a majority of their debt at fixed interest rates, hence mitigating any rise in interest servicing costs when rates rise."

Mr Jason Low of DBS Private Bank says rising rates will affect the sector's borrowing and financing costs, while also tightening the yield spread offered by the sector, adding: "However, we note that most Reits have restructured their loans from floating to fixed, thus the impact of rising rates is now more limited than before.

"As long as the US rate trajectory is slow and gradual, we think S-Reits will continue to do reasonably well on the back of the continued hunt for yield, reasonable valuations and ageing demographics."

Mr Andy Wong of OCBC Investment Research says that based on the Fed funds futures rate, the probability of at least one rate hike by December this year has increased to 72.5 per cent, from 11.8 per cent at the start of July in the wake of the post-Brexit referendum vote: "This may result in volatility in the share prices of S-Reits in the near term... Investors should be nimble, and position themselves to accumulate selective S-Reits on weakness.

"We continue to be overweight on the S-Reit sector. Despite the increasing likelihood of a rate hike in December, as mentioned earlier, we believe the interest rate environment would remain accommodative for a prolonged period of time.

"This is supported by the recent downward revision in the median projection of the Fed funds rate for 2017 and 2018 by Fed officials. Therefore, we expect tailwinds for good-quality defensive yield stocks ahead."

A version of this article appeared in the print edition of The Sunday Times on October 30, 2016, with the headline 'Impact of interest rate hikes'. Print Edition | Subscribe