Growth remains elusive among S-REITs, says OCBC Investment Research in a Feb 17 note. The FTSE ST All-Share Real Estate Investment Trusts Index (FSTREI) underperformed the broader Singapore market in 2024, and this trend has continued year to date.
Recent consumer price index (CPI) data in the US has come in hotter than market expectations, and OCBC’s house view is for only one 25-basis point (bp) rate cut by the US Federal Reserve this year. This will bring the fed funds rate to 4%-4.25% and the 10Y US Treasury yield may hit 5%.
Institutional fund flows have also painted “a bleak picture” for S-REITs, say OCBC’s analysts. Data from the Singapore Exchange showed that institutional investors net sold $1.59 billion of S-REITs in 2024. This outflow continued in 2025, with net sales amounting to $312 million from institutional investors year to date till Feb 7.
“We believe a more cautious (but not bearish) stance on S-REITs is warranted in the near-term, as valuations appear supportive and could limit downside ahead, barring any significant spikes in CPI data and sovereign bond yields,” write OCBC’s analysts.
The analysts want to see “a more meaningful decline” in inflation and “perhaps increased concerns over the macroeconomic landscape”, which would drive a flight to defensive sectors. Their order of preference of major sub-sectors from most to least preferred are: retail, logistics and industrial (data centres are most preferred within this segment), office, and hospitality.
There are also specific REIT picks. “While we are cautious on a sector level, we believe there are still pockets of opportunities on a bottom-up basis, and will thus look to selectively accumulate quality names on pullbacks. In this regard, we prefer S-REITs that can exhibit distribution per unit (DPU) growth and are backed by strong sponsors, have healthy financial positions (also lower risk of equity fundraising), and ideally some Singapore asset exposure.”
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OCBC’s top picks are CapitaLand Ascendas REIT (CLAR), with a fair value estimate of $3.30; CapitaLand Integrated Commercial Trust (CICT) at $2.35; Keppel DC REIT (KDCREIT) at $2.43; and Parkway Life REIT at $4.60.
Turnaround story for KDCREIT
In particular, OCBC highlights a “solid turnaround story” for KDCREIT. “Previous negative sentiment over its Guangdong data centres have been mollified by strong organic growth in Singapore and the DPU-accretive acquisitions of two high-quality data centres in Singapore, which would also reduce its percentage portfolio exposure to China.”
Although recent developments surrounding DeepSeek and potential implications on artificial intelligence (AI) compute costs have raised concerns over the demand of data centre space, OCBC says lower AI costs could help to increase the number of use cases as it will allow more companies to gain access to AI tools.
Singapore’s data centre market is more focused on AI inferencing rather than AI training — the former is less GPU-intensive. Hence, OCBC thinks Singapore will not be as adversely affected as markets that are more focused on AI training, such as Johor.
Furthermore, leases for data centres are typically long-term in nature (although there are also shorter-term leases). Hence, near-term impact should be well-mitigated, says OCBC.
‘Left disappointed’ by FLCT
Conversely, OCBC has removed Frasers Logistics & Commercial Trust (FLCT) and CapitaLand Ascott Trust (CLAS) from their top picks, though they maintain their “buy” ratings on both REITs with a $1.14 target price on FLCT and 99-cent target price on CLAS.
OCBC’s analysts say they were “left disappointed with FLCT’s management’s execution”, as it has failed to make any data centre acquisitions and did not penetrate the Japanese real estate market since its CEO Anthea Lee was hired. In addition, FLCT’s other acquisitions have “failed to excite investors”.
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Anthea Lee, formerly the CEO of KDCREIT, took over as CEO of FLCT on Aug 14, 2023.
OCBC says communication by FLCT’s management has been poor. “Its CEO’s stance shifted from ‘keeping its DPU fairly stable’ to ‘leaving its debt headroom for growth opportunities’, with the latter suggesting that less capital top-ups will be used to support its DPU given the impact on leverage (borrowings needed to support the top-ups).”
FLCT’s aggregate leverage stood at 36.2% as at end-2024, with its debt headroom being “eroded away” while DPU growth outlook is “lacklustre”, says OCBC. “We also see selling pressure on its share price, as FLCT said that its sponsor intends to sell the units received as management fees so as to safeguard FLCT’s Australian managed investment trust status.”
OCBC now expects FLCT’s FY2025 and FY2026 DPU to decline by 4.9% and 1.3% respectively.
CLAS still has a place in portfolios
For CLAS, OCBC points to two factors: global hotel performance is likely to normalise in 2025, and the REIT manager has committed to increasing the stability of its distributions by steadily growing its core distributions from operating performance, and supplementing this with non-periodic items and/or divestment gains when appropriate.
“While we think this will improve the quality and sustainability of CLAS’s distribution per stapled security (DPS) going forward, it also means that there may not be much upside potential from distributions in the near term,” they write. “Although CLAS is no longer in our S-REITs preferred picks list, we continue to like the name for its resilient and well-diversified portfolio, and think it has a place outside investors’ core real estate portfolio. We also like that CLAS has exposure to long-term stay properties like student accommodation in the US and rental housing in Japan, for which demand is less cyclical and more defensive.
Table: OCBC Investment Research
