We can see that over the past few months, SREITs and MREITs overall have been very volatile. Not only are they volatile, when you look back at the chart, pretty much all the REITs have been on a downward trend since their peak in May. The main reason for this is the interest rates.
FED Quantitative Easing Tapering
The QE is a way for the Fed to stimulate the US Market, which crashed in 2008. The by product of that is the cheap excess funds which flow out in search of better returns, especially in Asia. So there a few factors as to how SREITs and MREITs get affected. Understanding all these will help you have a better idea of what’s going on in the market rather than just panic at the dropping prices.
1. Outflow of funds from Asia
This is the cause for the entire market in the Asian region to drop. Sensing a recovery in the US, all the hot money that has flowed into Asia is now pulling out by large amounts. Especially funds which borrow in USD and invest in the region to capture the yield difference have to start clearing off their borrowing before interest rates spike up dramatically.
2. Increased interest rate on borrowings
Since all the REITs borrow to fund their property acquisitions, the increased interest rates will definitely affect them. However, the extent to which they are affected depends on many factors, i.e. the maturity profile of their debt, fixed interest rates versus floating, convertible vs non convertible, leverage ratio etc. Not all REITs will be affected the same way, so it is important to differentiate the stronger ones from weaker ones. Also REITs with the ability to raise rent will fare better as they can raise rents to partially offset the interest expense increases.
3. Difficulty in refinancing
We saw this in 2008 when liquidity dropped tremendously and a few REITs had trouble refinancing, to the point where they had to issue massively dilutive rights issue. Avoid this by sticking to the ones with strong sponsors like CMT.
4. Increased government bond yields means higher required returns on REITs
The government bond yields i.e. the SG 10 Year Government Bond is the standard for risk free rate in the Singapore market. It’s the same for others, MY 10 Yr, US 10 Yr etc. So when you invest in a risky asset, you will require a spread between the risk free rate and the risky asset. When the risk free rate increases, you will also demand a higher return from the asset, therefore the asset prices falls. Basically the idea is that if I get only 1% from the risk free, 5% from the REIT seems attractive. However if the risk free rate is now 4%, 5% may not be so attractive anymore, hence I may require say at least 6-8% yield from the REIT.
In the next post, I will examine some charts and give some explanation of what happened in the past to give you a better idea of what’s to come.
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