The impact of risk-free rates on trading yields

Goola Warden
Goola Warden6/8/2022 07:35 PM GMT+08  • 8 min read
The impact of risk-free rates on trading yields
REITs' P/NAV could be determined by their yield spreads as REIT unit prices are based on risk-free rates
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REITs’ unit prices are affected by a myriad of factors. For investors and market watchers who wonder why REITs’ price to net asset value ratios (P/NAV) vary between more than 2x for ParkwayLife REIT (PLife REIT) to 0.53x for Lippo Mall Indonesia REIT (LMIRT) and BHG Retail REIT, look no further than the yield spread between distribution per unit (DPU) yield and risk-free rates first.

In an interview earlier this year, Eng-Kwok Seat Moey, managing director and head of capital markets, DBS Bank, said that “we are comparing investing in a REIT with an investment in the 10-year government bond”. The REIT carries a “risk premium” which is the spread of the REIT’s DPU yield above the yield of the 10-year government bond, the so-called risk-free rate.

“For REITs, we value the assets with a discounted cash flow (DCF),” EngKwok points out. Discount rates are benchmarked against prevailing interest rates.

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