In the world of REITs, interest rates are a big deal because they directly impact the cost of borrowing.
A higher cost of debt can reduce distributable income, as more of the REIT’s revenue is spent on interest payments.
Singapore Dollar Swap Offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR) have been discontinued.
To a layman like myself, that leaves SORA (Singapore Overnight Rate Average) as the de facto standard for floating interest rates.
SORA Chart
Since Singapore is an open economy and the SGD is managed against a basket of currencies, global interest rates, particularly from the US Federal Reserve, have a strong impact on the SORA.
Looking at the SORA chart, it appears to mimic the Fed Rate over the past five years.
You can get Singapore domestic interest rates data from the MAS.
Floating Rate Debt: The Immediate Winner
As you might know, REITs can have loans tied to floating rates, meaning that as SORA rises, their interest expenses increase as well.
Therefore, REITs with a higher proportion of floating-rate loans are more vulnerable to rising SORA rates, i.e., higher borrowing costs.
Of course, just as water can sink a boat, it can also float a boat.
If a REIT has a high percentage of floating-rate debt, falling SORA rates directly reduce their interest expenses.
Consider the case of Frasers Centrepoint Trust (FCT).
As of their latest business update, 65.5% of their debt is hedged at fixed-rate interest.
Below are FCT’s average cost of debt over the last few years.
| Year | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2025 | 4.0% | |||
| 2024 | 4.3% | 4.1% | 4.1% | 4.1% |
| 2023 | 3.6% | 3.7% | 3.8% | 4.3% |
| 2022 | 2.2% | 2.4% | 3.0% | 3.5% |
Notice how the average cost of debt has peaked around Q4 2023 and Q1 2024 (remember the SORA chart), but have since started to come down a little.
The best is yet to come, and I expect the average cost of debt to continue inching downwards.
Fixed Rate Debt: Falling Rates Still Matter
You might think fixed-rate debts are unaffected by changes in SORA.
But here’s the twist: falling SORA is still beneficial for REITs even when they hold fixed-rate loans.
Why? Because when the time comes to refinance, these REITs can lock in new, lower rates, potentially saving a significant amount compared to their current average cost of debt.
It’s like locking in your Netflix subscription rate before they inevitably bump up the prices again.
Remember the table we saw earlier?
Frasers Centrepoint Trust’s average cost of debt was 4.1% as of the latest business update.
But wait a minute.
Didn’t they issue SGD$80 million in fixed-rate green notes due 2032 at 3.3% (0.7% lower than their average cost of debt) in March 2025?
More will follow. We are now seeing the reverse of what happened during a higher interest rate environment, as REITs can now refinance at rates potentially lower than their average cost of debt.
Better Times Ahead, Maybe
The price action of REITs is what many people have focused on, but SORA is what I have been paying attention to.
On the global front, the US is facing an increasing risk of recession, partly due to the implementation of tariffs by President Trump.
This has impacted market expectations, with a likelihood of two (or even three) Fed rate cuts this year.
With a declining SORA (that is expected to go even lower, when more Fed rate cuts happen) and currently depressed REIT prices, the waiting game continues for REITs.
While predicting interest rate movements is about as reliable as guessing who the next US president is going to be, one thing is clear: falling SORA rates present an opportunity for REITs to lower their cost of capital.
Whether through immediate savings on floating-rate debts or long-term refinancing opportunities for fixed-rate debts, the downward trend in SORA is a breath of fresh air for yield-hungry investors.
Yield Spread =
Average REIT Dividend Yield minus Risk Free Government Bond Yield
Meanwhile, I shall patiently collect my dividends as I await new developments.
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Kevin started Turtle Investor when his net worth languished at negative $25,755. His desire to turn things around led him to build passive income from investments and side hustles that pay for his daily expenses and vacations. You can learn more about Kevin here.
