SINGAPORE (Dec 20): The FTSE ST Real Estate Investment Trust Index is up 23.5% this year, buoyed by three interest rate cuts by the US Federal Reserve. The Straits Times Index by contrast is up only 8.8% year-to-date.  This year, the US Federal Funds Rate declined from the 2.25% to 2.75% range down to 1.5% to 1.75% as at end-Oct, when the Fed announced its final rate cut for the year.

Interest rates affect REITs in three ways.  REIT yields are directly affected by the 10-year bond yield, with S-REITs trading at around 3.5% to 4% above yields of 10-year Singapore Government Securities. REIT distributions are affected by cost of debt, hence a higher cost of debt depresses distributions.  Interest rates affect property valuations. Discount rates used in discounted cash flow models which in turn are used for valuing investment properties.

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