REITs Mired in High Rates Hit 52-Week Lows One After Another

Listed REITs, including SK REIT, continue to underperform
Investors turn away as interest costs rise and dividend capacity shrinks
Rebound seen as limited if rate pressures persist

Major listed REITs in Korea have been struggling, with one after another hitting 52-week lows. Once considered attractive investments because of their stable dividends, they are now being shunned by investors as high interest rates persist, driving up borrowing costs and reducing their capacity to pay dividends.

According to the Korea Exchange on Nov. 4, NH All One REIT fell to 2,150 won during trading on the previous day, setting a new 52-week low, before closing down 4.83%. SK REIT also hit an intraday low of 4,720 won, a new 52-week low, and closed down 1.43%. IGIS Value Plus REIT, ESR Kendall Square REIT and Koramco Life Infrastructure REIT also all hit 52-week lows during the session.

The KRX Real Estate REITs and Infrastructure Index, which tracks major REITs and infrastructure funds, has also fallen by about 17% since the start of the year.

The weakness in REIT stocks is due to the accumulated burden of high interest rates. Large secured loans taken out in the low-rate era, when annual rates were in the 2-3% range, are now coming due one after another, forcing REITs to refinance at today's much higher rates of around 5% per year. According to NH Investment & Securities, Koramco Life Infrastructure REIT has the highest share of debt maturing next year, at 67%, followed by Hanwha REIT and Shinhan Alpha REIT at 48%, Lotte REIT at 44%, and SK REIT at 40%. ESR Kendall Square REIT's share is relatively low at 12%, while Samsung FN REIT has no debt maturing in 2027, with maturities concentrated in 2028. The weighted average borrowing rates on debt maturing in 2027 are relatively low at 3.8% for SK REIT and 4.0% for Lotte REIT, so they are expected to face a relatively greater increase in financing costs when refinancing. By contrast, ESR Kendall Square REIT already has a relatively high rate of 4.6%, while Koramco Life Infrastructure REIT and Shinhan Alpha REIT have recently refinanced at rates approaching or exceeding 5%.

When borrowing costs rise, REITs' net income falls, directly leading to lower dividends for shareholders.

Their diminished appeal compared with safe-haven assets has also led investors to pull out. Yields on government bonds and high-grade corporate bonds remain firm, while traditional financial and holding companies have increased dividends in response to the government's efforts to encourage shareholder returns. As a result, investors have less reason to stay in REITs and take on stock price volatility. Although falling share prices have pushed headline dividend yields up to an annual 7-9% range, inflows of new capital remain limited.

"Last month, trading value declined across individual stocks and major REIT exchange-traded funds (ETFs), extending the weak trend seen in September," said Lee Eunsang, a researcher at NH Investment & Securities. "This was due to a broad wait-and-see stance ahead of interest rate decisions, with both institutional and foreign investors taking a cautious approach to trading individual stocks."

The effects of rights offerings, which major REITs carried out in stages over the past one to two years to acquire assets and manage debt, have also added to the accumulated burden. Selling intensified as concerns over the dilution of per-share value from new share issuances and potential overhang from shares available for sale had yet to be fully absorbed, just as interest rate headwinds mounted.

Some analysts say a rebound will be difficult if interest rate pressures persist. "Until the direction of interest rates becomes clear, subdued trading and a wait-and-see stance will continue," Lee said. "As long as interest rate pressures remain, a meaningful rebound in REIT share prices will be limited."

Investors are likely to need to respond selectively while assessing whether interest rates stabilize. "Korean REITs and infrastructure posted a return of -11.9% during domestic rate-hiking cycles, compared with an annualized return of 2.8% over the full period," said Kim Joongwon, a researcher at Hyundai Motor Securities. "Assuming domestic rate hikes end in the first half of next year, investors should assess whether market rates and new financing costs stabilize before considering selective increases in their allocations." He added, "Investors need to assess the sustainability of rental income and dividends, as well as debt maturities and the proportion of fixed- and floating-rate debt, and factor in whether actual interest burdens are easing alongside the extent of price declines when making investment decisions."

This content was produced with the assistance of AI translation services.