How do S-REITs hedge against a rise in interest rates?

Inflation in the US has reached 8.3%, which hit a 4-year high (Source: Statista, data as of August 2022). In Singapore, core inflation rose to 5.1% in August, a nearly four-year high (Source: MAS, data as of Oct 5, 2022). The prospect of higher interest rates has dampened demand for various financial products, and real estate investment trusts ( REITs ) are one of them.

However, with the higher interest rates increasingly looking like the new normal, do REITs still attractive to investors?

REITs can use various methods to protect themselves from rising interest rates. Take a look at how these S-REITs are hedging against the rising interest rate.

MLT is supported by a strong Mapletree Investments Pte Ltd (MIPL) sponsorship. The strength and reputation of the sponsor are essential factors for income-seeking investors seeking a safe haven in the coming economic storm.

As of 30 June 2022, 80% of the REIT's S$5 billion borrowings are hedged or locked in at a fixed rate. This gives the MLT a buffer to mitigate the adverse impact of rapidly rising interest rates.

In addition, MLT completed two acquisitions in the first quarter of the fiscal year 2023 (Q1 2023) and planned to redevelop 51 Benoi Road, doubling its gross floor area. This redevelopment will increase the REIT's rental income and grow its income organically.

As of Jun 30, 2022, approximately 81% of Fraser Logistics & Commercial (FLCT)'s debts are locked in at fixed rates, and its borrowing costs are only 1.6%. The majority of its loans will mature between FY2024 and FY2026. The REIT has also locked in 80.6% of its loans at fixed rates.

Besides, FLCT divested Cross Street Exchange in March at a 28.3% premium to book value and recently entered into a forward financing arrangement for a prime warehouse in the UK, demonstrating its ability to recover capital effectively.