On Jan 25-26, the Federal Open Market Committee (FOMC) was as visibly hawkish as the US Federal Reserve board signalled clearly that the first policy rate hike will take place in the upcoming Mar 15-16 FOMC. No surprise then that economists are increasingly rounding on the Kokomo policy option - where the Fed is likely to raise rates - fast. In addition, the Fed’s asset purchase program (QE) tapering will be further reduced in Feb 2022 and be completed by early March this year, before the March FOMC.
This is just not a good time for REITs and the reason is the yield spread. The immediate impact of inflation and rising interest rates isn’t on the valuation or operating costs, or cost of debt - although managing cost of debt is probably a major KPI among REIT managers. It is the impact of the yield spread. As pointed out by SGX Research, the average yield spread between S-REIT distribution per unit (DPU) yield and risk-free rates as measured by the yield on the 10-year Singapore Government Securities is 3.99%. In order to maintain the yield spread, DPU yields have to rise, or REIT unit prices have to fall.
“In the US historically, when you see inflation and interest rates up, you see REITs getting hit on stock prices. But eventually people see that rents are picking up and propertes are doing well, but initially there is a bit of a price shock,” observes David Snyder, CEO of Keppel Pacific Oak US REIT's manager.
