Should You Buy Singapore REITs After the US Fed Rate Cut?

Due to the expectation of a rate cut in the market, the unit prices of Singapore's real estate investment trusts (REITs) are constantly rising.

Then, last week, the US Federal Reserve finally implemented its first rate cut in nine months.

As of now, the stocks of leading companies in industries such as CapLand IntCom T, KEPPEL REIT, and Mapletree PanAsia Com Tr have achieved a total return rate of over 20% since the beginning of the year.

However, for those who haven't purchased yet, these returns have become a problem for them.

The Expectation Game

Here’s what people don’t tell you: whether a stock does well or not depends on your expectations.

I’ll level with you — if you bought REITs expecting to be rewarded with quick capital gains from rate cuts, it’s a case of mismatched expectations.

Yes, REITs can appreciate over time. 

This scenario occurs when specific REITs are able to raise their distribution per unit (DPU) consistently over the long term. 

But that’s not why most investors should own REITs.

The income REITs offer cannot be ignored. 

It’s the component that’s more reliable, as REITs must pay out at least 90% of their taxable income to maintain their tax-advantaged status.

Said another way, it’s income you can count on if the REIT performs well.

When Falling Prices Are Good News

Here’s the thing that may surprise you: if you bought REITs for income, you’ll be less disappointed when unit prices fall.

Why is that so?

Simply said — as prices fall, you’ll get to reinvest your distributions at lower prices to generate even more income. 

Each dollar of distribution buys more units, which generate more distributions, which buy more units.

That’s not a bad outcome, now is it?

Think about it this way: if you’re collecting distributions for the next 10 or 20 years, wouldn’t you prefer to reinvest them at lower rather than higher prices?

The Reality Check

Let me make this clear: The unit price has indeed risen recently, but this does not mean that the performance of real estate investment trusts has suddenly improved.

There will be a time lag between lowering interest rates and real estate investment trusts being able to refinance their outstanding loans at lower interest rates.

Some real estate investment trusts have loan terms that last for several years.

Others may have already appropriately hedged against interest rate risks.

These benefits will not manifest overnight.

In the "Smart Dividend Portfolio", we are carefully reviewing each asset and verifying the outstanding debt amount of each real estate investment trust that we hold.

We want to understand which real estate investment trusts can gain greater benefits from lower interest rates - not just expecting them to have such an effect.

Get Smart: Focus on What Matters

Let’s not kid ourselves — it’s not the kindness of lower interest rates alone that will carry DPUs higher in the future.

Rate cuts are like a tailwind for cyclists. 

They help, but you still need strong legs to pedal up the hill.

Ultimately, it’s the combination of quality assets and capable management teams that will make the most of any interest rate environment. 

A REIT with prime properties and capable managers will thrive whether interest rates are 2% or 5%. 

A poorly managed REIT with aging properties will struggle regardless.

That’s what we focus on at the Smart Dividend Portfolio — finding REITs with:

• Properties in locations that matter

• Management teams with proven track records

• The ability to grow distributions over time

And that’s just the starting point. 

So, if you are asking "Should I purchase REITs after the interest rate is lowered?", then your question is incorrect.

The correct question should be: "Is my motivation for purchasing real estate investment trusts appropriate?"

If you are chasing capital gains based on the decisions of the Federal Reserve, then you are playing a guessing game.

If you invest in stable real estate investment trusts with the consideration of obtaining stable returns in the next ten years, then the short-term price fluctuations become less important.

So, stop staring at the scoreboard. Enjoy the game instead.