Based on InvestingNote's tracking, out of 44 S-Reits / Biz-Trust, more than half (or 26) reported lower DPU (dividend per unit) compared to the previous year's.
The lower DPUs can be partly (or mainly) attributed to high interest rate environment.
What if US Fed does not cut interest rate or the cut is smaller than expected, and the interest rate continue to hold at around 4% level.
- First, S-Reits' DPU may continue to suffer, as many S-Reits may hedge their interest cost earlier and have not borne the full blunt of the higher interest rate. Hence, when they need to re-finance their loan, they need to incur higher interest cost and lower DPU.
- Second, Singapore (and Hong Kong) properties tend to have low capitalisation rate (cap rate). If the higher for longer environment persist, say, 5 years, the cap rate may become higher and hence lower the valuation (or NAV) of the properties undering S-Reit. Lower valuation will lead to higher leverage ratio (as borrowings remain unchanged). If leverage ratio gets too high (e.g. 45% or more), the S-Reit will be in trouble.
I do not know how US interest rate will unfold moving forward. But I will keep my reits positions small.
14 Mar update: IFAST has a good article in Nov 2023 on how high interest rates may affect S-Reits in near future. https://secure.fundsupermart.com/fsmone/article/rcms282441/be-selective-in-s-reits-as-rates-stay-higher-for-longer
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