Analysts at CLSA and DBS Group Research are positive on Singapore REITs (S-REITs) as the interest rate hike cycle nears its end.

The US Federal Reserve raised the target Fed funds rate by 25 basis points in May, bringing the ceiling rate to 5.25% along with a more dovish tone suggesting that rates could be on hold as early as the middle of this year.

Following this, CLSA analyst Wong Yew Kiang has moved his sector rating to “overweight” from “underweight”, adding that the overall risks for S-REITs is subsiding amid firm operational metrics.

Meanwhile, DBS analysts Derek Tan and Dale Lai point out that there are expectations of rate cuts to stimulate growth if required from 2024 onwards. This is conducive for interest rate sensitive sectors like S-REITs in the immediate term, they add.

As recent conversations turn more constructive as more investors seek opportunities to invest into the sector, the DBS analysts see S-REITs outperforming the Straits Times Index in the coming months. They believe that the relative underperformance of interest rate sensitive sectors like S-REITs will start to turn the corner and exhibit relative outperformance going forward.

“With FY2023 yield of 6% implying a yield spread of 4.3% at -1 standard deviation, it is attractive for investors to reconsider re-entering the sector, albeit selectively, with a focus on those S-REITs with the ability to sustain dividends in a continued high interest rate environment,” say Tan and Lai.

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Through the first quarter of the year, operational metrics have remained robust despite the shroud of uncertainty surrounding sustainability as the economic outlook dims. Tan and Lai note that Singapore’s economy is expected to record slowing growth momentum in 2023 of 2.5%.

Amid this, the analysts see strength in retail and industrial segments which are supported by multi-year occupancy rates as well as accelerating q-o-q trend in rental reversions of about 8% to 14% — pointing to a steady organic growth profile. Office rental reversions and occupancy levels remain strong, aided by vacancy rates at record low levels of  under 3% although DBS senses that leasing spreads are weakening on the back of an economic slowdown.

The analysts also highlight hospitality S-REITs, which continue to impress with sustained revenue per available room growth as well as levels that exceed those recorded pre-Covid-19, with more strength anticipated on the back of China’s travel reopening.

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S-REITs at an inflection point, CLSA upgrades sector to 'overweight'

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