S-Reits with higher floating and short-term debt likely to gain immediately from rate cuts

SINGAPORE-LISTED real estate investment trusts, or S-Reits, that have a lower proportion of fixed rate debt are expected to be immediate beneficiaries from potential interest rate cuts.

Those that have a higher level of debt due to be refinanced over the next one-and-a-half years also stand to benefit sooner from rate cuts, said analysts.

Interest rates are expected to come down this week, when the United States Federal Reserve’s monetary policymaking body meets.

US Federal Reserve chairman Jerome Powell said last month that “the time has come” for interest rates to come down, although how quickly they would fall depends on economic data.

With S-Reits taking a hit in the higher-for-longer interest rate environment over the last few years, lower borrowing costs will come as a welcome relief for them.

A rate cut will mean that interest payments on floating rate debt will immediately decrease. On the other hand, debts that are pegged to a fixed rate will need to wait for their interest rate hedges to expire before benefiting from rate cuts.

Therefore, S-Reits with a higher proportion of floating rate debt compared to fixed rate debt will immediately benefit from a rate cut, explained Darren Chan, a senior research analyst at Phillip Securities Research.

More unhedged loans, lower financing cost 

Among those that will see a more immediate impact on their borrowing costs are S-Reits with more than 20 per cent of their loans left unhedged, said DBS Group Research in a note on Aug 20.

DBS Group Research said that the top beneficiaries of the reduction in financing costs are likely to be CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) .

S-Reits that have about half of their loans tied to floating interest rates could also see savings from lower floating loan rates. This could translate into an increase in earnings of between 7 and 10 per cent in FY2025

Reits in this category include Suntec Reit , OUE Reit and Lendlease Global Commercial Reit (LReit) .

CGS International said in a research note on Aug 30 that funding costs could start to come down from the second half of FY2025. This is based on its view that there will be a 75 basis point cut in rates in the fourth quarter of 2024, and a further 150 basis point cut in FY2025.

S-Reits with a lower proportion of fixed rate debt and those with a higher percentage of debt due to be refinanced over the next 18 months could be the early beneficiaries, said CGS International.

These include FEHT, CDLHT, Frasers Logistics and Commercial Trust, Paragon Reit, Starhill Global Reit, Mapletree Pan Asia Commercial Trust and LReit.

And while Reits due for refinancing in FY2025 could see their loan costs increase, its analysis suggests that cost savings from floating rates will offset the increase, said DBS Group Research.

Other metrics matter

CGS International encouraged investors to adopt a more aggressive stock-picking strategy for S-Reits to ride on the virtuous interest rate cycle.

In doing so, Chan of Phillip Securities warned that investors should not focus solely on the proportion of floating rate debt.

This might lead them to overlook other operational or market risks that could undermine an S-Reit’s long-term performance.

For example, a Reit with a high proportion of floating rate debt stands to benefit from rate cuts. However, if it has a low portfolio occupancy or is not receiving payments from tenants, its distributions will be affected.

Other factors investors should assess are the quality of assets, leverage levels, occupancy rates, quality of management and the potential for higher rental reversions, said Chan.