Rising interest rates and a looming over-supply in the property market may affect real estate investment trusts (Reits) but the market will stay healthy.
That was the finding of a stress test on the sector by the Monetary Authority of Singapore (MAS), which noted that Reits listed here have enough earnings to absorb the impact of higher interest rates even amid challenging conditions.
Investors like Reits for their stable yield. The sector's assets have been growing at an annual average of around 7.8 per cent since 2013 and accounted for about 7.9 per cent of total market capitalisation on the Singapore Exchange in the third quarter.
However, as Reits in general rely on debt to bankroll their property acquisitions, higher interest rates may lead to a larger financial burden. Their income could also be affected as rental demand could be hit by large amounts of new supply coming on the market.
There will be 376,000 sq m of office space completed next year, up 292 per cent from the fourth quarter this year, while supply in the industrial sector will grow 157 per cent to 2.17 million sq m.
The MAS stress test assessed the resilience of Reits in a situation where their earnings before interest, tax, depreciation and amortisation fell 35 per cent while interest rates rose three percentage points.
The result showed that office, industrial and retail Reits would still be able to generate earnings that were at least enough to cover their interest expense.
Still, Reits may have to trim their dividend payouts, given the economic headwinds and surge of new supply until 2018.
"Investors should therefore exercise caution in their search for yield in the current low interest rate environment," the MAS cautioned.
Wong Wei Han
Correction note: An earlier version of the story stated that office, industrial and retail Reits would still be able to generate earnings that were at least 1.8 times the interest expense. It has been corrected to say that earnings were at least enough to cover their interest expense.