2 Biggest Risk Facing Parkway Life REIT

Daniel Lee
3 minutes ago
4 min read

It is no secret that I strongly believe that Parkway Life REIT is Singapore’s best REIT, both in terms of the management’s ability to grow their DPU consistently over the last decade, coupled with the fact that they are operating in the healthcare sector that is supported by strong demographic tailwinds.

However, a good REIT doesn’t automatically equate to a good investment, and unfortunately, since I first covered the REIT back in 2023, Parkway Life REIT has continued to remain overvalued.

That said, I’ll not be talking about the valuations of Parkway Life REIT in this article but instead focus on two key risks in the Japanese market that Parkway Life will be facing in the coming years that may significantly impact their operational performance, given that over 30% of their gross revenue is derived from Japan.

1) Higher Borrowing Cost Environment

Unlike the other developed economies that have been reducing their short-term interest rate, Japan’s central bank is operating in the opposite direction, with both short and long term rates rising drastically over the last 36 months.

Given that the weighted average debt maturity of Parkway Life’s debt portfolio typically ranges from 3 to 4 years, we can expect their borrowing costs to worsen further in the future, as seen from the 2 to 5-year government yield behaviour and the central bank's intention to hike further in the coming 24 months.

In fact, the average cost of borrowing has already increased from 0.53% in 2020 to 1.48% in 2024. As of 3Q 2025, borrowing cost stands at 1.57%. It wouldn’t surprise me if we were to see this increase further by another 50 to 100 basis points in the years to come as they refinance their ongoing debts.

The increase in borrowing costs is expected to reduce the net income generated from the Japanese operation, which would result in a decrease in the DPU in the years to come. While the management has an interest rate hedge in place, these hedges are not permanent and are on a rolling basis.

In the short run, the impact of a higher interest rate environment is likely to be mitigated by their ongoing hedges. However, in the long run, should the current interest rate environment persist or worsen, Parkway Life REIT will feel the full impact of a higher borrowing cost.

2) Weaker Japanese Yen

Given that over 30% of Parkway Life REIT (Nursing Homes) is denominated in Japanese Yen, any adverse behaviour in the strength of the Japanese Yen against the Singapore Dollar would translate to a lower DPU due to the foreign exchange losses.

As far as the strength of the Japanese Yen is concerned, despite the increase in interest rates, the strength of the Japanese Yen has weakened considerably as the market’s pessimism towards the government’s fiscal discipline far outweighs the higher interest return.

Unfortunately, the trend of a weakening Yen is expected to continue further as the government’s fiscal policy is still expansionary and large. Couple that with the demographics and structural growth headwinds, the fundamentals that could support a stronger yen are unlikely to materialize in the short term.

Similar to the interest rate situation, the management has in place a good FX hedge that offsets the impacts of any FX fluctuations until 1Q 2029. That said, beyond then, should Japanese Yen continue to float at its current levels, the impacts of a weaker yen would be fully felt in the net income which would see a lowered DPU due to FX losses.

What I Think Is Going To Happen

Ironically, the best-case scenario for Parkway Life REIT is if a recession were to occur, which may force the Japanese central bank to potentially cut rates back down to 0%. This would be a strong positive catalyst for Parkway Life as their revenue drivers are defensive and “recession-proof”.

Looking at how the Japanese government is behaving, my base case is that the interest rate would probably increase by another 100 basis points in the coming 24 months, while the strength of the Japanese Yen is likely to continue to float around current levels as the weakening of the Japanese Yen would also be offset by a weakening in SGD.

As such, any DPU growth in the coming 2-4 years would probably be unwound by the impact of a higher borrowing cost and FX losses then when the current hedges expire. The reality right now is that if we were to strip off the impact of the FX hedges, YTD DPU as of 3Q 2025 would have witnessed a 5.5% decrease on a year-over-year basis.

At the current levels that Parkway Life is trading – 3.70% yield from operations – it just doesn’t justify starting a position at such low yields when the risk to their operating performances in the coming 3 years is starkly clear.

Hopefully, the price would come back down to justify starting a position – yield from operations of at least 5% - but then again, looking at how investors are behaving, we could perhaps only see this happening when the impacts of the higher borrowing cost and FX losses are materialised on the DPU.

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