INTERVIEW
Q
Q
How will rising inflation impact REITs ?
The most immediate effect of rising inflation is the negative impact on profit margins through higher operating expenses , including wages and utility costs . The other negative aspect of rising inflation is that it could adversely affect consumer sentiment and retail spending . It could also affect the profitability of tenants and erode their occupancy costs . However , landlords can adjust for inflation over the long term through higher rents , and rental increases are likely to mitigate underlying inflation pressures for REITs .
What are the implications of rising interest rates ?
Rising interest rates pose a greater risk for REITs through , firstly , higher borrowing costs , increasing their overall cost of capital and lowering their net income . Secondly , higher long-bond yields will erode the attractiveness of Singapore REIT ( S-REIT ) or REIT ? yields versus risk-free benchmarks . Higher long-bond yields could also have a negative impact on capital values since it will also make the real estate asset class less attractive , leading to a possible correction in asset values .
Q
What is your outlook on the Asia Pacific REIT markets ?
Higher long bond yields are a headwind for REITs ’ share price performance , but a lot of the concerns over rising bond yields have been in the price . Despite rising 10-year bond yields and short-term rates , we have seen more flattening of the yield curve , which has actually been positive for S-REIT performance . Also , we believe that the re-opening play , such as retail and hospitality REITs , have largely priced in . Investors would start rotating into industrial REITs as a hedge against the risk of an inverted yield curve and prospects of stagflation concerns by year-end .
Photo by Karollyne Hubert on Unsplash
13