Gearing is the ratio of a REIT's debt to its total property value. It has also been often referred to as leverage. Gearing is usually presented as a percentage. For example if a REIT has $30 million in debt on its balance sheet and the total property value is $100 million, its gearing would be 30%.
There is no rule of thumb on what a good gearing ratio should be. Gearing ratio of a REIT should be read in context with prevailing market conditions including the state of the economy and prevailing interest rates. A high gearing ratio in times of high interest rates may mean that the REIT is paying too much interest on its loans, limiting the amount of yield that it can pay to shareholders. On the contrary a suspiciously low gearing ratio in times of low interest rates could mean that the REIT is not making the most of leverage opportunities available in order to expand and grow. Typically, REITs today have been fond of keeping gearing ratios between 20%-40%. Anything that deviates far beyond these limits is out of the ordinary.
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[…] low interest rate climates, REITs may take on additional gearing in order to seize available growth opportunities. However as interest rates climb, the REIT manager […]
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