Negative Interest Rates Impacting REIT Financing, Chatham Financial Says

Laura Grant, director of global real estate hedging and capital markets group at Chatham Financial, joined REIT.com for a video interview at REITWeek 2016: NAREIT’s Investor Forum at the Waldorf Astoria New York.

Negative interest rates have been a consistent topic in 2016. Grant commented on the practical considerations for REITs and their financings.

While there’s no real expectation of negative interest rates in the United States, Grant noted that the Federal Reserve has started to require banks to include negative rate scenarios in their annual stress testing.  This has highlighted an asset liability risk for banks, she said, with the effect that banks have now started to include zero percent floors in their loan agreements.

“This is where it’s really started to impact REITs,” Grant said. She explained that problems arise when borrowers want to hedge a floating rate loan with a swap contract.

“This mismatch between the derivative and the underlying debt is a source of ineffectiveness from a hedge accounting standpoint, and that’s really a key consideration for REITs,” according to Grant.

Meanwhile, Grant contemplated pending changes to the accounting rules for derivatives and hedge accounting from the Financial Accounting Standards Board (FASB).

“The biggest impact will be the recognition of hedge ineffectiveness,” Grant said.