The Singapore market — as measured by the benchmark Straits Times Index — has performed strongly today, rising by around a fifth year-to-date to reach a 17-year high, outpacing nearly every other regional bourse.
The gains were powered by the three banks, which make up half the index’s weightage, and the Singapore Exchange itself, as investors load up in anticipation of a market review now underway. Many other stocks have also hit 52-week or are near their year-highs — but not the REITs, which, as a whole, remain traded at rather depressed valuations of 10% off their lows.
The poor showing is because expectations for rate cuts were overly aggressive in September, with as many as six seen through to 2025, amid the backdrop of weak US economic data points then.
Since then, the market has swung to the other extreme, and bond yields have bounced very significantly, with a 10-year yield of close to 4.5%. Investors have reset their expectations and are now expecting just two more cuts in 2025. As such, prices of REITs have come down once again after a brief spike.
Yet, this is precisely why Gerald Wong, founder and CEO of investment platform Beansprout, senses a buying opportunity. “To me, that presents an interesting risk-reward profile for investors who are looking at opportunities within the Singapore market,” says Wong in an interview with The Edge Singapore.
While it is within common expectations how higher rates will hurt the REITs for jacking up borrowing costs, what is going to matter more significantly is how each of the REITs can either enhance their portfolios or take on capital management initiatives to boost their distributions or work up an appetite to make big acquisitions again, says Wong, referring to how CapitaLand Integrated Commercial Trust has bought 50% of Ion Orchard from CapitaLand Investment at an agreed property value of $1.85 billion. Keppel DC REIT, separately, announced the acquisitions of two data centres for $1.38 billion.
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For Wong, such deals take place because managers take the signal that interest rates have peaked. “There is now a higher level of certainty around how some of these transactions can potentially be priced - rates may not come down sharply, but at least I know that I won’t see a significant decline in my capital values,” says Wong, who was head of Singapore equities research at Credit Suisse.
He adds: “So long as the assets are able to hold their rentals against what we might have been one year ago when there’s still no certainty as to whether interest rates have peaked, then it becomes very hard to be pricing some of these transactions.”
“So it is more from a directional perspective — so long as we know that the direction from here on is going to be either maintained or lower, then that opens up the window for the REITs to be able to undertake these transactions,” continues Wong.
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He does not see deal flows slowing down with rate cut expectations dialled back. “Effectively, so long as there’s clarity in terms of the interest rate direction, that is what is most needed to be able to drive further transactions within the REIT market. If, on the other hand, there’s going to be uncertainty on the interest rate direction, then that is when some of these transactions might be held back.”
So far, the debate has been more about how sharply the interest rates will be cut and not whether rates will be raised again. “If we are able to have that continued certainty on interest rates having peaked, then I think that is sufficient to unlock more of these transactions in the market,” he says.
Wong’s suggestion to investors is to look for REITs that can grow their distributions, either through portfolio rejuvenation or through capital management, such that even if interest rates were not falling sharply, they would still be able to either maintain or increase their distributions and he has identified three picks from this sector.
OUE REIT
In recent years, OUE REIT has undertaken several key asset enhancement initiatives, including the renovation of what is now known as Hilton Singapore Orchard and Crowne Plaza Changi Airport. Wong sees the REIT as generating higher net income for the property and believes that the market does not fully appreciate the potential gains yet.
Besides hospitality, OUE REIT’s portfolio consists of other asset classes, namely, office and retail. While Wong acknowledges that each of these assets has their distinct supply and demand dynamics, what is more important is how each REIT can enhance its portfolio. “It is more important to look at each of these REITs from the bottom-up angle, and what they can then potentially do to be able to enhance their distributions with the overall hospitality or office market actually not growing as sharply in terms of the rents,” he says.
He also points out that OUE REIT now trades at below half its book value, which Wong attributes to concerns with a potential over-supply of the office market that might weigh down on rents when up for renewal in 2025. Still, Wong notes that office REIT peers do not trade at such a discount to book value and that OUE REIT offers a higher yield as well. “I think that presents a better risk-reward profile — if it is able to maintain its distributions,” says Wong, who has a target price of 32 cents for OUE REIT.
Elite UK REIT
Wong’s second pick is Elite UK REIT, which is unique among S-REITs for its portfolio of UK properties. He observes that in recent months, this REIT has made several divestments. While they are piecemeal and not material relative to the total portfolio size of GBP415 million ($710.6 million), Wong sees the manager as active in capital management so as to unlock value for unit holders. “What is also interesting to me is that these assets are being divested at a premium to the asset valuation that other investors are willing to pay,” says Wong, who has a target price of GBP0.44 for this counter.
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For example, most recently, on Nov 27, the REIT sold a property called Hilden House for more than GBP3.28 million, which is a 6% premium above its valuation. Nearly two months earlier, on Oct 2, it sold Sidlaw House for almost GBP1.28 million, at a 41.7% premium.
When asked, Wong agrees that it cannot be assumed that Elite can fetch a premium across its entire portfolio of 150 or so properties. “But I think what is also helpful is, once again, go back to the interest rate backdrop that we’ve discussed because what we see in Europe and the UK is that they have actually led the Fed in terms of cutting interest rates. Even before the Fed started cutting interest rates in September, the ECB started cutting in June, and then the Bank of England started cutting in August.”
Prior to the rate cuts, European property assets suffered a “very significant hit” when rates were hiked to combat inflation, which spiked to nearly double-digit levels following the pandemic. Inflation has since eased to below 2% — a common long-term target set by policymakers. “This has given certainty in terms of the direction of the interest rates and provides a floor towards the asset valuation,” says Wong.
One peculiarity of Elite is that its dominant rental source is basically the public coffers of the UK, and it is well-flagged that the country’s fiscal position is not exactly in the best shape, thereby raising rent collection risks. Wong acknowledges the concerns but points out that with the REIT trading at a yield of around 10%, that is, in a way, already incorporating the market’s cautious view towards this exposure.
Wong also acknowledges that investors are far from enamoured with the UK’s prospects, both as a country and an economy. “There’s always a price for every asset. Every market presents its own set of risks and opportunities, but it is often a question of whether this risk has been fully priced in and whether there is scope for any positive surprise going forward,” he says.
AIMS APAC REIT
Finally, Wong favours AIMS APAC REIT, which owns a $2.16 billion portfolio of 25 properties in Singapore and three in Australia, ranging from logistics to business parks to high-tech buildings.
According to Wong, who has a $1.43 target price on this counter across the various sub-sectors, logistics is the one with better fundamentals where there’s still “decent” rental growth coming through. For AAREIT, it was even able to improve on its distributions this year, including the most recent 1HFY2025, which ended Sept. Specifically, 1H25 distribution per unit (DPU) of 4.67 cents is equivalent to 51.4% of his FY2025 estimates, with the most recent 2Q25 DPU of 2.40 cents 5.7% higher than 1Q25 and 2.6% above 2Q24.
The REIT was able to generate higher gross revenue of $93.5 million, up 7.7% y-o-y, thanks to strong rental reversions of more than 16% despite lower occupancy rates. The REIT was able to fetch the strongest reversion in rental from its logistics and warehouse sub-segment, up a whopping 28.1%, while the industrial properties managed 8.9%. “That’s a reflection of the strength of the portfolio and what the REIT manager has done to enhance the portfolio,” says Wong.
He believes that AIMS APAC REIT could continue to grow its numbers as it has put in place a steady pipeline of asset enhancement moves, which would help fetch higher rental rates. Two recent examples are progressive upgrading work at 15 Tai Seng Drive and the refurbishment of 7 Clementi Loop.
Wong also considers the current valuation of this REIT to be reasonable. The fact that rental and distribution can grow indicates the quality of the portfolio. For context, less than five of the 40 or so REITs here were able to pull off the same feat.
