I’ve personally owned a few reits in my portfolio so I have a natural vested interest in what was going on in the reits environment. Given that we are now fresh into the new year and with interest rates finally (I mean FINALLY) increasing, I think it’s important that we are forward looking in trying to analyze a few factors that might impact our selected reits.
Most Reits generally thrive on low interest rate environment due to the leverage they have on their books. When interest rate rises, their costs of capital would naturally have to increase because both the costs of borrowings and cost of equity would go up so issuing either bonds or rights would become more expensive than before.
I’ve heard many people citing the rising interest rate environment as bad for reits but if you think about it, it generally applies to most companies that leverage and the only way we are able to know the true impact is by going a little more in-depth about the capital structure of the company.
The sensitivity analysis is taking into account the respective reits’ profile on the debt expiry, fixed loans rate and current costs of debt rate when computing the overall impact to the distribution income. The table above is using 1% (100 basis points) increase in interest rates.
Again using my favourite Reits, FCT as an example, the impact to the distributional income for a 1% increase in rates is marginally low at -1.1% and you can see from their capital structure why it is so. Of course, there are other factors which might come into play such as occupancy rates, rental reversion, lease expiry but you can see that for as long as they keep the rate increase marginally slow, the impact to the distribution will not be immediate and huge. When markets overreact to external news like this and bring the share price down, I’d knew it could become an opportunity for me.
There’s so much variable factors in play for reits than many investors would have think of and it’s interesting to see how these matured market would play out this year, given the obvious macro-economic slowdown and a rising interest rate.
Are you still eyeing Reits in this current environment?