Japan’s benchmark rate hike expected to spare S-Reits with country exposure: analysts

JAPAN’S first interest-rate hike in 17 years is not expected to significantly impact Singapore real estate investment trusts (S-Reits) with portfolio exposure to the country, said analysts, but the yen’s depreciation could lead to lower income from properties there.

Carmen Lee, OCBC’s investment research head, reckoned the impact on S-Reits would be minimal at least until next year, as interest rates are still very low. She also pointed out that most S-Reits have no exposure to Japan.

Similarly, Darren Chan, a senior research analyst with Phillip Securities Research, noted that while S-Reits with loans in yen may incur higher borrowing costs, the recent rate hike was “marginal”.

Krishna Guha, analyst at Maybank Securities, said S-Reits may be impacted in other ways.

First, they are likely to pay higher interest if their debt or cross currency hedges, which are denominated in yen, are repriced.

Second, the discount rate used for valuation of assets in Japan is likely to go up.

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The negative impact of higher discount rate may be offset by higher rents.

Third, if the flow of funds shifts away from Japan to Singapore, S-Reits could be the beneficiaries.

Guha said that it is still uncertain whether the rate hike will benefit S-Reits.

He added that this will depend on a combination of the three factors, as well as how the individual Reits are positioned.

Chan of Phillip Securities Research added that the rate hike might also make properties in Japan less attractive to invest in, as the positive carry spread will be less than before with higher borrowing costs.

A positive carry spread refers to a situation where the income incurred from a property investment more than offsets the cost of funding that investment.

Changing times

The changes in the Japanese market come as some S-Reits look to it for expansion opportunities due to low borrowing costs.

Digital Core Reit : DCRU 0%, for instance, announced last November that it was entering the Japan market with the acquisition of a data centre in Osaka.

Its manager’s chief executive, John Stewart, had told The Business Times in an interview last year that it would prioritise growth in Japan as investors can still earn a positive spread on its interest rates.

Meanwhile, in February, ESR-Logos Reit announced a US$70 million investment in an ESR Japan Income Fund, which will invest in stabilised core logistics assets and development logistics assets in Japan.

The transaction is expected to be 1.8 per cent accretive to the Reit’s distribution per unit.

Some of the reits with exposure to Japanese assets include Daiwa House Logistics Trus : DHLU 0%t (DHLT), Parkway Life Reit : C2PU 0%, First Reit : AW9U 0%, CapitaLand Ascott Trust : HMN 0%, Mapletree Pan Asia Commercial Trust : N2IU 0% and Keppel Reit : K71U 0%.

Just a pinch

The Bank of Japan (BOJ) increased the cost of borrowing from minus 0.1 per cent to between 0 and 0.1 per cent last week, amid confidence that deflationary pressures were easing.

The move heralded an end to the era of negative interest rates in the country.

Despite the rate hike, the yen fell to a 34-year low against the US dollar on Wednesday (Mar 27), prompting observers to suggest that Japanese authorities might intervene in the market.

Chan said that S-Reits with unhedged borrowings in yen on their balance sheet could feel the heat.

For example, DHLT, which has logistics and industrial assets in Japan, could be affected, given that all its loans are in Japanese yen.

“DHLT will not be immediately impacted by the rate hike as 100 per cent of its loans are fixed. However, we can expect the borrowing cost to increase when they refinance 10 billion yen (S$89 million) of loans due end-November 2024,” he said.

Sliding yen

The weak yen will impact the income of S-Reits and their net asset value, said analysts.

Chan said that income generated from Japanese properties will decrease as a result of the weaker yen after conversion to Singapore dollars.

While this will affect the overall revenue and profitability of S-Reits with Japanese properties, the impact can be partially mitigated by foreign currency hedges, he added.