4 factors mitigating inflation’s impact on REITs

Two of these factors are related to utility costs.

Higher interest rates and borrowing costs are amongst the impacts of higher inflationary pressures on the Real Estate Investment Trusts (REITs) sector; but these, according to the OCBC Investment Research can be mitigated by four factors.

The first factor would be for REITs, especially those which have large sponsors, to engage in bulk purchase of electricity.

One REIT which can bulk purchase is CapitaLand Integrated Commercial Trust (CICT) since they are part of the CapitaLand Group.

Price growth of electricity and gas accelerated to 17.2% year-on-year (YoY) in January 2022, suggesting utility costs ahead for the S-REITs sector. The price increase could also be further exacerbated by the Russia and Ukraine situation, which has resulted in a spike in oil prices, the analyst added.

The next thing REITs can do is a “passthrough of higher utility costs to tenants in the form of higher service charges.”

Ascendas REIT, for example, can recover their utility expenses from tenants on their overseas assets, except vacant spaces, according to OCBC.

REITs can also impose “tighter cost controls and use of automation and technology to reduce manpower costs such as security contracts,” to alleviate the impact of inflation.

Amongst REITs that have done this are Mapletree Industrial Trust and CICT who said they will “leverage on technology to execute some property management functions such as robotic cleaning.”

Lastly, REITs can lease structures that have annual rental escalations, direct CPI-linked indexation and/or periodic market rent reviews like Maple Tree, Ascendas REIT, and Suntec REIT

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