Inflation is a double-edged sword for REITs. Inflationary pressures may keep rents high, but they could also pressure interest rates indirectly, through yields on risk-free rates such as yields on 10-year bonds both in the US and in Singapore.
Yields on 10-year US treasuries have risen to as high of 1.6%, up 70% this year, as inflationary fears triggered by the US stimulus took hold. Rising bond yields are likely to affect interest rates, and in a roundabout way, discount rates that investment property valuations rely on. Eventually, capitalisation rates are also affected.
Hence, rising yields impact REITs in three main ways — on interest rates and hence their cost of debt, and cost of capital; on discount rates and capitalisation rates, and hence REITs’ capital values; and of course the yield spread - REITs take their pricing off risk-free rates, and REIT yields can rise in tandem with risk-free rates. If yields are going to expand, then something has to give and it’s likely to be the market price of the REIT.