[Rate Cuts] Is It A Good Time To Invest In REITs?

Over the past few weeks, I’ve been seeing a lot more content revolving around the expectation of a price recovery in REITs driven by the rate cuts that are happening in the second half of 2024.

While it is an open secret that central banks are starting to cut their interest rates (starting with the European Central Bank in June 2024), the impact of the rate cuts might not affect the fundamentals of the REITs anytime soon and neither will it affect the REITs equally due to the following three reasons.

1. Already Refinanced High

Unfortunately, most of the REITs have already refinanced their existing debt between 2023 and 2024 which has caused the weighted average cost of borrowing to go up significantly over the last two years.

We’ve seen the impacts of that in the form of a worsening distribution across almost every REIT that was listed in the Singapore Exchange with higher borrowing costs being sighted as the main reason for the decline in distribution.

As the weighted average debt maturity of most REITs usually hovers around 2 to 3 years, there will likely be a delay of a few years before the positive impacts of rate cuts can be felt in the bottom line of the REIT's performances as they are unable to immediately refinance to a debt with a lower interest rate.

2. Rate Cuts Takes Time

That said, even if interest rates were to be cut starting from the latter half of the year, it would still take the central bank another 12 to 24 months to slowly taper their interest rates back to the neutral interest rates level. (Estimated to be at around 2.5% to 3%)