After facing two years of erosion due to the impact of higher interest rates, S-REITs will post a turnaround in distribution per unit (DPU) growth over FY2025-FY2026, at 3.4%, according to DBS Group Research.
DBS analysts Derek Tan and Geraldine Wong cite a stable operating climate and expectations of a more “gradual” rate cut trajectory through 2025.
Fund flows within the sector have been mixed in 2024, but DBS is seeing “incremental interest” into the sector. Singapore REITs’ share prices have remained volatile through 4Q2024, reversing most of the 14% gain in 3Q2024. The recent volatility is due to swings in rate cut expectations, with the latest shift driven by a more hawkish tone after Donald Trump’s election as the upcoming US president.
One avenue to watch is retail investors, says DBS, who currently have more than $90 billion invested in six-month Treasury bills (T-bills), “which will need to be reinvested come 1H2025”.
S-REITs are trading at 0.8 times price to book (P/B) and FY2025-FY2026 yields of 6.2%-6.3%, which is more than 3% above other yield alternatives, such as bonds, deposits and current T-bills with rates of 3.0%, say DBS. Hence, they see a “strong opportunity” for S-REITs to capture some of these flows.
That said, downside risks to growth are likely to persist in 2025 amid the ongoing geopolitical uncertainties, say the analysts. “With supply also picking up in the logistics, hotel and business park sectors, we take a more conservative stance in our sectoral positioning.”
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S-REITs are near “peak rates”, says DBS, with erosion from refinancing tapering off. “Base rates have fallen by 50 to 60 basis points (bps) h-o-h in 2H2024 and will likely continue to reduce heading into 2025… . A 1% dip in interest rates will drive a 2.5% rise in DPU, which we have yet to price into our forecasts.”
In a Jan 2 note, the analysts say they prefer retail, industrial, office and hotel REITs, in that order.
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While interest rates have eroded distributions over the past two years, S-REIT managers have been able to navigate DPUs back to levels seen in 2021-2022 before interest rates started to meaningfully impact distributions, says DBS.
Based on DBS’s FY2025 DPU forecast and taking a percentage of the average of 2021-2022 DPUs (pre-rate hike DPU), close to one-third of S-REITs can deliver DPUs that are between 96%-112% of their “pre-rate hike” DPU, implying that the valuations of these S-REITs “should be trading close to levels seen in 2021-2022”.
Leaders of this trend include Far East Hospitality Trust , Frasers Centrepoint Trust , Keppel REIT, Parkway life REIT, CapitaLand India Trust and Mapletree Industrial Trust , which are projected to deliver DPU that is close to levels delivered back then, says DBS.
Overall, DBS’s top picks are Frasers Centrepoint Trust, with a target price of $2.75; CapitaLand Integrated Commercial Trust ($2.30); Mapletree Logistics Trust ($1.75); Mapletree Industrial Trust ($2.75); Keppel REIT ($1.15); and Parkway Life REIT ($4.80).
The latter, in particular, is a “potential dark horse”, says DBS. “We believe that Parkway Life REIT deserves special attention given the anticipated 20% jump in its DPU come FY2026, post the master lease reset, which is expected to push yields above the historical mean.”
As at 11.15am, units in Parkway Life REIT are trading 4 cents higher, or 1.06% up, at $3.80.
Tables: DBS
