M&A plays among names such as IREIT Global, First REIT, Sabana Industrial REIT and Suntec REIT are also likely to take place with REIT valuations remaining “dislocated” compared to physical and private market transactions.
REIT listings may take place around this period as well with about three to four S-REIT initial public offerings (IPOs) in the pipeline and are in advanced stages of listing by the end of 2025. These are in sectors such as data centres, student and workers accommodation, industrial, and healthcare, notes Natarajan.
After the results season for the 1QFY2025, earnings from 10 of the 15 REITs covered by RHB came within expectations. Two of the REITs covered stood slightly above Natarajan’s estimates while three came in below expectations.
The analyst notes that there were no major changes to the REITs’ guidance operationally. Most of them are still expecting to see stable occupancy rates and positive rent reversions with the exception of certain markets like the US and China and sub-sectors like office and hospitality.
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He adds that the US tariffs have not had a major direct impact on the REITs so far, although many managers have expressed caution and are watchful for any secondary impact.
This quarter, REITs have also benefitted from the sharp fall in domestic interest rates, with most of them reporting lower interest expenses overall.
“The fall in benchmark rates has also resulted in lower yields for alternative options, ie deposit rates, T-bills and Singapore savings bonds, and rising yield spreads for S-REITs – potentially creating room for fund inflows to the sector if the tariff overhang is removed,” Natarajan writes.
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As the three-month Singapore overnight rate average (SORA) fell by 70 basis points year-to-date to 2.31%, about three quarters of the S-REITs saw flat to moderate interest cost declines on a q-o-q basis, especially S-REITs with a Singapore-centric focus.
The decline in SORA had a direct impact on the REITs’ Singapore dollar (SGD)-denominated floating rate loans, the analyst says, adding that most of the REITs also noted “slight reductions” in their bank loan margins amid a “flush of liquidity in the banking system”.
Based on their latest results announcements, Far East Hospitality Trust(FEHT), OUE REIT, Sasseur REIT, First REIT and Acrophyte Hospitality Trust saw the largest declines in interest costs q-o-q at 60 basis points, 50 basis points, 30 basis points, 30 basis points and 30 basis points respectively.
Natarajan also notes that more than half of the REITs that reported their results also saw positive y-o-y and q-o-q growth in their net property incomes (NPIs) thanks to stable occupancy and positive rent reversions.
At this point, the analyst still prefers large-cap, high-quality and Singapore-centric REITs.
“Amidst a currently volatile macroeconomic backdrop, we expect Singapore-centric REITS to continue to relatively outperform, and see larger fund inflows,” he writes, citing the stable and supportive government policies after the latest general election, fiscal policy support, falling domestic interest rates and the stable SGD as some of his reasons.
Among the sub-sectors, Natarajan prefers the industrial, office, healthcare and suburban retailers while hospitality remains his least preferred sub-sector.
His top picks are CapitaLand Integrated Commercial Trust(CICT), CapitaLand Ascendas REIT(CLAR), Frasers Centrepoint Trust(FCT), Keppel REIT, and AIMS APAC REIT (AA REIT).
Natarajan has “buy” calls for all of these names with target prices of $2.40, $3.20, $2.39, $1.05 and $1.48 respectively.
