The Motley Fool

Singapore REITs and Loans: Do Overseas Assets Impact the Cost of Borrowing?

REIT investors are probably aware of what makes a REIT great or poor. It’s important for investors to look at operational metrics such as occupancy rates, rental reversions, and weighted average lease expiries (WALEs) in order to assess the revenue generation capability and stability of a REIT. On the expenses side, a key metric to watch out for is the cost of financing for the REIT, as they rely on borrowings in order to function effectively.

I decided to explore whether REITs with overseas assets had an overall lower cost of borrowing compared to REITs with purely local asset exposure. For my study, I took a sample of seven REITs, three with purely local properties, and the remaining four with purely overseas properties. The selection also cuts across different property types to provide a wider breadth of properties so as to eliminate the probability of the cost of financing being tied to one particular property type.

The REITs with Singapore properties only are Frasers Centrepoint Trust (SGX: J69U), Mapletree Commercial Trust (SGX: N21U) and Far East Hospitality Trust (SGX: Q5T). The four overseas REITs are Manulife US REIT (SGX: BTOU), Sasseur REIT (SGX: CRPU), IREIT Global (SGX: UD1U), and Frasers Logistics and Industrial Trust (SGX: BUOU), or FLT.

Local versus overseas properties

The cost of financing for local REITs tends to hover around the same level (i.e., 2.8% to 3%) as the loans were probably provided by local banks. For the overseas REITs, there is a wider range in terms of cost of financing, ranging from as low as 1.5% to as high as 4.5%.

Country exposure does play a role

The country of exposure does play a major role in determining if the REIT is able to obtain a lower cost of financing. For IREIT and FLT, where the cost of financing was lower than for the local REITs, the assets were located in low-interest-rate countries. Sasseur’s and Manulife’s properties are in China and the USA, respectively, where rates are generally higher than in Singapore.

Strength of the sponsor is a contributing factor

REITs with strong and reputable sponsors will also be able to negotiate for better financing rates on their debt compared to REITs with either no sponsor or a relatively unknown sponsor. Banks are more amenable to lending at preferential rates to REITs with solid assets and a sponsor with a long track record.

The Foolish conclusion

Given the study above, we can conclude that the location of the REIT’s assets plays a major role in determining if the REIT can obtain a lower cost of borrowing. REITs with properties in low-interest-rate countries are able to obtain much lower financing rates for their loans, which gives them an advantage when it comes to managing their costs.

Investors should note that a strong sponsor is also a pertinent factor in obtaining a lower cost of financing, and I did not adjust for this in my simple study above.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of Frasers Centrepoint Trust, Mapletree Commercial Trust, and Manulife US REIT. Motley Fool Singapore contributor Royston Yang owns shares in Frasers Logistics and Industrial Trust.