For those who had been in the market long enough, I’m sure you are aware of the face of this guy.

With an uncontrollable inflation in hand, the Federal Reserve of United States had no choice but to rely on interest rates hike mechanism to curb inflation. That, however, had been proven not so effective over the past few quarters – but still, the rise of interest rate is still undeniable.

According to sources and publicly available data, it looks like the Fed is steering towards a 450 basis points, which means there is a room of interest rate hike to be played out at least for until the end of 1H 2023.

Although REITs had always been a good investment for risks-adverse investors, the rising interest had impacted the sentiment for REITs. But is it really true where a high interest risk would “kill” the performance of REITs?

There are several factors for investors to assess the impact of rising interest rate on REIT.

Firstly, the investors must understand where Securities Commission of Malaysia had granted a temporary upliftment in gearing ratio of REITs from 50% to 60%, which will last towards the end of 31^st December 2022. But in the world of business, it is not like everyone could get cheap short term financing and for a REIT to clear the debts in one go, it is certainly not an easy task.

Hence, I would recommend investors to look for REIT with gearing ratio below 50%.

Next, investors would need to lookout the average financing rate of the REIT, as well as the debt expiry profile of the REIT. As for the financing rate, no doubt that with a rising interest rate, the costs of the REIT’s operation will increase, too.

However, a channel check with banks noted that REITs are currently exploring options to convert floating rate debts (which means the debt where the rate is adjusted with accordance to OPR if it was MYR based) to fixed rate debts. Of course, a premium of 100 to 150 basis points need to be paid by the REIT to lock-in the interest rate.

Generally, any REIT that is basing an effective rate of 3.50% or below is considered good as they have ample room to manage the rate hike.

As for the debt expiry profile, this is a very subjective topic where some investors think a longer debt expiry profile is better, but yet some would think the shorter is better given the current outlook, and it also needs to be reflected based on the stability of earnings of the REIT.

For example, if a REIT had floating interest rate but long expiry, this is not that “great” for the REIT itself unless otherwise refinancing of the REIT was done. However, in the current interest rate outlook, any REIT with a short, i.e. 2 to 3 years focused expiry from now, they are definitely exploring refinancing program at this moment, where if they were to opt in to fixed rate financing such as SUKUK, the costs of the REIT would be more stabilized.

Heck, if the initial sunk-in interest costs were higher and impacted investors sentiment at first, there might even be investment opportunity to be leveraged on!

Based on my preliminary screening, there are 3 REITs that might fulfil the criteria we mention and could be safer investment choice over other REITs, namely KIPREIT (5280), HEKTAR (5121) as well as ARREIT (5127).