The outlook for interest rates in the region, and in particular Singapore, hinges on the outlook for inflation in the US.
On the face of it, as Trump starts his second term, the US has strengthened economically against its adversaries and partners. It’s unclear if China is an adversary or partner, perhaps a bit of both. Trump’s economic policies are unknown, perhaps even to him. Parsing some of the garbled promises on the campaign trail makes for a murky outlook for the interest rate cycle. The uncertainty can create trading opportunities for the fleet of foot. From the vantage point of January, the outlook is good for banks and neutral to negative for S-REITs.
“Policymakers remained reticent about the rate cut outlook in 2025, noting that the Federal Reserve is “significantly closer to neutral” and rate considerations from here onward would “need further progress toward 2% inflation”. Against this backdrop, the risk for 2025 is between the Fed cutting modestly and not cutting at all,” says DBS Group Research in a Jan 20 report.
“Over the past few years, Singapore banks and S-REITs have exhibited divergent performance. Singapore banks benefited from higher interest rates and net interest margin (NIM) expansion, which drove robust profit growth and dividend hikes. Meanwhile, higher interest rates constrained growth for S-REITs, eroding distributions,” DBS says. The local bank believes that interest rates may trend lower this year, which “could boost our REIT estimates”.
“The direction of interest rates is not so simple. Singapore is starting to decouple, but not much. Singapore rates may move a bit lower. We are in an uncertain situation because some Trump policies are inflationary. Some are not. And some campaign promises may or may not happen,” says Charlie Chan, a long-term REIT investor & CEO of Charlie Chan & Partners, which holds a CMS licence.
Trump has signed executive orders on various policy priorities, including immigration, energy, trade/tariffs, and deregulation. “To the extent that tariffs are announced, we are looking for whether they are to be used as a core policy (e.g., to change the global trading system or raise revenue) or as a communication tool (e.g., as negotiating leverage),” says a Barclays Research Jan 19 report.
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The uncertainty of ‘seriously but not literally’
“Our approach has been to take Trump 'seriously but not literally'. The truth is that we — and the rest of the Street and perhaps even in the incoming administration — lack clarity about what exact policies could eventually be implemented,” says the Barclays Research report, a day before the inauguration.
Trump made four key economic policy proposals: increasing tariffs, reducing/reversing undocumented immigration, decreasing taxes, and reducing regulation.
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“In the US, expected pro-cyclical tax cuts and deregulation may bolster the economy, though inflation risks will need careful management,” Julius Baer says.
“We have tried to quantify some of these proposals, including a scenario of sharp tariff increases, which, unsurprisingly for conventional economic trade models, yields very negative results in terms of growth and inflation for the US, as well as its trading partners. Modelling a sudden, significant reduction in labour supply due to deportation shows similar negative results,” Barclays Research adds.
Elsewhere, Bank Of America (BofA) Global Research expects higher Federal Funds Rates (FFR) and risk-free rates than they had pencilled in last year. BofA suggests that the US 10-year treasury yield forecast, assuming the Federal Reserve doesn’t cut rates, is likely to settle at an average of 4.75% this year (see table).
For the UK, BofA says, “price action post the CPI print reveals that concern about sticky inflation has been a key factor behind [UK] Gilt underperformance.”
Barclays Research’s updated headline CPI expectation for the UK is higher by 20 basis points (bps) through much of 2025. The majority of the upward revision in 2025 reflects updated energy assumptions, with the rest reflecting the fine-tuning of our assumptions on budget policies and the pass-through of the increase in water bills to consumer prices, Barclays Research says.
On Jan 15, Luis de Guindos, vice-president of the European Central Bank (ECB), said that inflation had fallen to 2.4% in 2024 in the EU. “Most measures of underlying inflation continue to suggest that inflation will settle near our 2% medium-term target on a sustained basis. One of these measures, the Persistent and Common Component of Inflation, for example, which has the best predictive power for headline inflation over the one to two-year ahead horizon, has been around 2% for more than a year,” says de Guindos.
Julius Baer expects the ECB to undertake aggressive easing as Europe faces growth challenges requiring structural reforms alongside fiscal stimulus and rate cuts. If Trump’s America imposes tariffs on the EU, it will cause an additional brake on growth, Julius Baer points out. On Dec 18, the ECB’s deposit facility and marginal lending facility were at 3% and 3.4%, respectively.
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The Australian Broadcasting Corporation reported that the Reserve Bank of Australia (RBA) is likely to cut rates when it meets on Feb 17–18. Economists forecast that the RBA’s cash rate, currently at 4.35%, could fall to 3.35% this year. Australia’s 10-year bond yield was at 4.55% on Jan 20.
Challenges of higher for longer
Unlike economies such as the US, EU, Australia, China, and Japan, all of which have independent central banks, the biggest challenge for Singapore-listed stocks and REITs (S-REITs) is the outlook for the FFR and US risk-free rates. Singapore’s interest rates and risk-free rates take their cue from the US. Although the absolute figures are lower because of the ample liquidity in the system, the trend of Singapore Government Securities is similar to that of US treasury yields.
The yield spread between property yields and borrowing costs in Singapore for some of the island’s top-tier assets is negative. “Capitalisation rates for CBD Grade A offices are typically in the range of 3.2-3.5% while commercial mortgages are currently still close to 4%,” says Tahlil Khan, executive director of office leasing advisory of JLL, in an email in early January.
In an update on Jan 20, CBRE said in Singapore, “demand across all sectors was relatively lean in 2024, with small to medium-sized firms accounting for the bulk of leasing transactions. Tenants are becoming more selective, leading to a concentration of activity in the Grade A segment”.
For S-REITs such as Keppel REIT, with 77.2% of its assets in Grade-A offices in Singapore and 18.8% in Australia, its average cost of debt is 3.68% compared to the capitalisation rates in Singapore, which range from 3.15% for One Raffles Quay to 3.55% for Keppel Bay Tower. Capitalisation rates range from 4.75% to 6.5% for the REIT's Australian properties. Pinnacle Office Park in Macquarie Park was valued at a “cap” rate of 6.88% in June 2024. Despite being narrow, the spread between Keppel REIT’s costs of debt and its portfolio yield provides support for its unit price.
S-REITs have regionalised and globalised. Among them are REITs with pure European assets, such as IREIT Global and Stoneweg European REIT. The ECB is set to lower rates, which could ease the pressure on these two REITs. Notably, IREIT Global has refinancing due in early 2026. However, investors are concerned that Stoneweg European REIT’s sponsor is an alternative investment manager and hedge fund. This may account for Stoneweg European REIT’s high distribution per unit (DPU) yield.
Elite REIT has UK job centre assets mainly leased to the Department of Works & Pensions. The UK economy is sluggish, but strategists are less certain if the Bank of England can lower minimum lending rates given the still stubborn inflation. The slowing UK economy is perversely positive for Elite REIT’s job centres.
CapitaLand Ascendas REIT’s assets comprise 65% Singapore, 13% Australia, 12% US and 10% UK/EU. It could benefit from ample liquidity in Singapore and the tailwind of the rate cycle in Australia and Europe. However, occupancies for some of its US assets have eased since they were acquired, and US rates may not decline much from current levels (FFR is at 4.5%).
Counter-cyclical in China
As the rest of the world grapples with inflation and the threat of higher interest rates from Trump 2.0, China has a different problem: slowing growth and falling prices. For 4Q2024, China recorded GDP growth of 5.4%, an upside surprise that enabled the Middle Kingdom to record a full-year 2024 growth of 5%, meeting the Chinese government’s target.
“We are cautious about such a sudden and outsized improvement in the headline GDP data. We highlight some discrepancies in the data that may not fully capture economic developments. We think the official 4Q GDP data may overstate underlying momentum. While exports front-loading lifted industrial production growth, domestic demand indicators continued to paint a gloomy picture, with a deeper contraction in property investment and still-soft retail sales,” says Barclays Research, following the release of China’s data on Jan 17.
In the meantime, China’s 10-year government bond yield is at 1.65%, which is about a 10-year low. On Jan 20, the People’s Bank of China kept its one-year loan prime rate (LPR) at 3.1% and 5-year LPR at 3.5%. Despite the dovish backdrop, CapitaLand China Trust has fallen by more than 13% over a one-year period, while Sasseur REIT rose by 1.5% over a one-year period.
S-REITs are rate-sensitive, as REITs base their unit price on the spread between their DPU yield and the risk-free rate. In terms of sectors, the spread between the property yield and the average cost of debt is pretty narrow.
Investors could invest in a REIT with a tailwind to gain any upside. Analysts reckon that data centres are the strongest sector in terms of demand.
On Jan 20, CLSA upgraded Keppel DC REIT from Hold to Outperform. Following the equity-funded acquisition of KDC SGP 7 and KDC SGP 8, which are AI-ready data centres in Singapore that were completed in December, “Keppel DC (KDC REIT) not only lowers its exposure to weaker markets (China) but at the same time raises its exposure to the resilient Singapore market, strengthening its balance sheet and future-proofing its portfolio with more AI-ready data centres,” CLSA says.
“In our view, KDCREIT is well-positioned among peers despite macro headwinds, with the potential divestment of its beleaguered China portfolio as a further catalyst. We update our model to incorporate the acquisition, the divestment of Basis Bay and better metrics for colocation in Singapore,” CLSA adds.
