It’s all about the expectation of interest rates. US President Donald Trump wants inflation to come down so that the federal funds rate (FFR) can fall to 1%, according to US media. He is likely to announce a new Federal Reserve (Fed) chair to replace Jerome Powell in May. The contenders are Kevin Hassett or Kevin Warsh, who was a Fed governor from 2006 to 2011. Christopher Waller, a current Fed governor, has been mentioned along with BlackRock’s Rick Rieder and Scott Bessent, Trump’s Treasury Secretary.
Whoever the new chair is, the Fed may lose its independence, with Trump pressuring the Fed and the Board to lower interest rates to 1%. This would be less of a roadblock if crude oil prices are falling or expected to fall.
Interest rates affect all forms of investments, especially equity prices. For starters, they have a direct impact on stock prices. All we need to know is that lower rates raise valuations. In a nutshell, the capital asset pricing model (CAPM) estimates the expected return on equity or Re (CAPM Re). In its most simplified form, lower interest rates lead to lower CAPM Re, and hence higher prices. CAPM, in turn, provides the cost of equity inputs into the weighted average cost of capital (WACC). When rates fall, WACC drops, encouraging borrowing, investment and growth.
Over the longer term, for equities, the impact depends on many factors — including the company’s business strategy, its WACC and its capital management strategy. For instance, a company like Bukit Sembawang Estates, which is in a net cash position, is unlikely to benefit operationally from a decline in interest rates.
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However, lower interest rates could encourage buyers of Bukit Sembawang’s properties. According to DBS Group Research, as of June 2025, 55% of the 158 units at 8@BT in Bukit Timah and 92% of 132 terrace houses at Pollen Collection have been sold. Its next project, Nim Collection Phase 4, is expected to be launched in early 2026, comprising 186 units of 99-year leasehold landed homes along Ang Mo Kio Avenue 5. Lower rates, especially risk-free rates, raise capital values, including property, making Bukit Sembawang’s properties more attractive to buyers.
Separately, expectations of lower interest rates affect highly indebted companies positively, lowering their WACC and CAPM Re. Given that SORA had been falling in 2025 to very low levels, stocks such as Addvalue Technologies, IX Biopharma, CNMC Goldmine, Soilbuild Construction and ASL Marine were the top performers in 2025.
REITs
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Interest rates affect S-REITs in three main ways. The most obvious is the impact on distributable income and distributions per unit. Indirectly, interest rates affect discount rates, which affect the capital values of investment properties owned by REITs.
More directly, as a hybrid between equity and debt, risk-free rates affect the pricing of REITs through their yield spread (somewhat akin to bonds). With lower risk-free rates, REITs’ unit prices should be higher.
Operationally, the most obvious impact is the cost of debt on the REITs’ distributable income. REITs voluntarily announce the sensitivity of their distributions per unit (DPU) or distributable income to interest rates.
The REITs that are likely to be positively impacted by declining US interest rates are those with pure USD assets, such as United Hampshire US REIT, which is the US-based S-REIT with the soundest portfolio, Keppel Pacific Oak US REIT and Prime US REIT. Both Digital Core REIT (DC REIT) and NTT DC REIT have introduced European assets and assets in other jurisdictions in the mix. Mapletree Industrial Trust also has a significant portion of US assets and USD debt, which would benefit from lower US rates.
For the US-based S-REITs whose DPU will be directly affected by lower US rates, only KORE and UH REIT have announced their sensitivity to US rates. KORE says its sensitivity for Secured Overnight Financing Rate (SOFR) is based on the 24.3% of floating debt as of end-June 2025. Every 50 basis points (bps) in SOFR translates to approximately US$0.89 million ($1.14 million) in income available for distribution a year. UH REIT owns 20 grocery-anchored and necessity shopping centres. Its sensitivity to SOFR, based on 21.5% floating-rate loan and revolver facility drawn, is 0.054 cents in DPU p.a. for every 50 bps movement in SOFR, or 1.3% of trailing 12-month DPU.
Different ways of capital management
A recent interview with Gerard Yuen, CEO of UH REIT’s manager, shed light on the way REITs manage their debt.
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“We borrow in US dollars, so there’s a direct correlation to whenever the Fed cuts interest rates, we benefit directly. That’s not necessarily the case for those who borrow in SGD on this relationship. It’s important to remember the Fed has cut a lot since the end of 2024. In fact, altogether, the Fed has cut rates by 1.75% since the end of 2024,” says Yuen.
He adds: “There’s a one-for-one correlation for us with US dollar rates, because our loans are in US dollars. I would say we’re probably one of the few REITs where the DPU has already started trending up in the first half of 2025 versus our peers.”
Like most conservatively managed REITs, United Hampshire US REIT keeps around 20% to 21% of its loans on floating rates. Even though it refinanced US$350 million announced on Nov 25, 2025, the loan comprises a US$50 million delayed draw tranche available for up to 12 months following the refinancing. The new loan facilities also include term loans and a revolving credit facility with staggered maturity dates and extension options.
“It’s called a delayed draw. So, in other words, you don’t actually have to draw the money, but when your mortgage loan comes due in November of this year,” says Yuen. The delayed-draw facility may be used for potential acquisitions by UH REIT or to refinance the Upland Square Mortgage Loan, which will be maturing in November 2026. The New Facilities also include a US$100 million revolving credit facility, doubling the previous revolver size.
“The loan that we signed is a floating-rate loan. When we enter into a swap, that’s when we fix a certain interest rate. The beauty of swaps is, of course, that you can do certain sizes. You don’t have to do the whole thing. You can do it at different times, different lengths. The timing really doesn’t impact us as much as if it were a mortgage loan, for instance,” Yuen adds. “From our perspective, it is very attractive because we solve two loans with one new loan.”
As he tells it, the banks were keen to lend to UH REIT. “When your sector is doing well, you tend to be able to negotiate competitive terms with your bank, with your tenants. And so this is a similar case. The asset class is doing so well that the banks were able to give us this attractive feature of not having to draw on the loan for one year, but it’s there, sitting ready for you. And the second attractive thing is that we actually doubled the revolver (revolving facility) that we have. The revolver is typically what we use to pay for acquisition, capex etc.,” he says.
Debt mix
DC REIT’s largest debt exposure is in euros, not USD. As of the end of September 2025, 53% of DC REIT’s debt was in euros, 24% in USD and 23% in Japanese yen. “As part of our hedging strategy, we manage currency risk by issuing locally-denominated debt to act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective. Consequently, we tend to run higher LTV’s (loan-to-value) outside the U.S. to match the currency of our borrowings with the currency of the assets they support. Frankfurt is our largest market, and as a result, we have a relatively higher proportion of euro-denominated debt,” says a spokesperson for DC REIT’s manager.
“We do not have any immediate-term plans to change the mix of our debt, but as we continue to grow and diversify our portfolio, we will constantly assess our capital structure to ensure the proper mix of debt,” she adds.
Indirectly, on capital values, according to market observers, capitalisation rates and discount rates in the US for office properties haven’t moved much despite the 1.75% decline in FFR in the past 12 to 15 months. In addition, valuers use comparables — that is, sale prices of similar assets in the same vicinity. For instance, Manulife US REIT divested Peachtree in Atlanta for US$133.8 million at a capitalisation rate of 9.1% in May 2025, lower than the end-2024 valuation of US$164 million. Valuers would have to take this transaction into account when valuing investment properties in the vicinity. As a result, capital values tend to lag the interest rate cycle.
On the other hand, if risk-free rates fall, this would immediately have an impact on the US-based S-REITs’ unit prices, especially if they are functioning REITs paying out 90% of their distributable income, such as UH REIT, DC REIT and NTT DC REIT.
Whither US interest rates?
A note of caution: it isn’t a given that risk-free rates will fall. The five-year chart of the 10-year US Treasury yield shows that it remains stubbornly above 4% despite the Fed’s lower FFR last year.
In a DBS Group Research report dated Jan 7, authors Eugene Leow, senior rates strategist, and Samuel Tse, rates strategist and economist, appear somewhat ambivalent about the outlook for lower rates and their impact on the US risk-free rate. The direction of rates for 2026 will depend on the evolution of some of the key themes that have been at play over the past several quarters, Leow and Tse write in their report. Divergence between outperforming financial markets and some slowing of the real economy, the global inflation call, central banks’ policies and Fed independence will be the critical issues to watch, notes the DBS report.
“In an optimistic scenario, the additional crude oil production from Venezuela could be market-friendly for oil prices, inflation (nearly half of the US CPI basket consists of direct and indirect energy consumption) and monetary policy,” PGIM’s Singh says.
The issue of Fed independence will be heavily debated with concerns about the appointment of the new Fed chair, notes DBS. Market participants will also be watching to see if Governor Cook gets removed. “Some premium on the former is already reflected in frontend USD rates where more rate cuts are factored in 2H2026 (beyond May, where Fed chair Powell steps down),” adds DBS.
“While not our base case, if the Fed gets compromised, rates will be meaningfully lower than where they should be relative to what economic conditions warrant. A collapse in frontend USD rates and a second-order spike in inflation expectations (and a much steeper curve) may well ensue,” says DBS.
In addition, G10 central banks may no longer sound dovish. DBS believes they are turning hawkish. DBS adds: “With significant cuts delivered over the past few quarters, many of the central banks are already close to, if not already at, neutral. Some easing is expected from the Fed and the BOE, but for the rest, a neutral to hawkish bias may start to take hold.”
As a result, the current rally driven by expectations of lower rates may not be sustainable. On the other hand, DBS has an STI target of 10,000, and JP Morgan has a target of $70 for DBS to help lift the STI to 10,000. In the immediate term, however, the more resilient US-based S-REITs may rally on expectations of lower interest rates even if risk-free rates ultimately fail to fall.
