Data Centres Shine in Q3 Amid S-REITs’ Mixed Bag Performance
Singapore-listed real estate investment trusts (S-REITs) delivered a largely predictable performance in the third quarter of 2024, but data centre REITs emerged as the unexpected star, defying broader sector challenges. While operational results were stable overall, higher interest rates continued to exert pressure on financing costs and distributions.
Data Centres Take the Lead
Data centres stood out as the sector’s high achievers, delivering exceptional rental reversion figures. RHB analyst Vijay Natarajan highlighted a key contract renewal with rental rates surging over 40%, underscoring the robust demand for digital infrastructure. Keppel DC REIT, in particular, showcased significant earnings strength, reflecting a broader trend towards tech-focused real estate investments.
Mixed Results for Other Sectors
Despite the positive showing from data centres, most S-REITs posted earnings within expectations, with many grappling with rising costs. Among 17 S-REITs and property trusts that disclosed distributable income, 11 reported declines, while distribution per unit (DPU) figures were evenly split between gains and losses.
The hospitality sector was a notable disappointment, with growth slowing year-on-year. Revenue per available room (RevPAR) for key players such as CDL Hospitality Trusts and Frasers Hospitality Trust dipped below expectations, marking a sharp contrast to the sector’s strong double-digit growth in 2023.
In the office segment, Mapletree Pan Asia Commercial Trust (MPACT) faced unexpected setbacks in its Japan portfolio, including a major tenant exit that weighed heavily on asset valuations.
Challenges Loom on the Horizon
Analysts caution that S-REITs may continue to face headwinds in the coming quarters. Rising financing costs, coupled with a slower-than-expected decline in interest rates, are likely to keep DPU growth under pressure. This outlook has been compounded by the re-election of Donald Trump in the U.S., which analysts expect will slow the pace of rate cuts by the Federal Reserve.
International markets also present risks. Declining asset valuations in the U.S. and Australia, driven by weaker operating performance, could spill over into S-REITs with exposure to these regions. Similarly, Chinese properties remain under pressure despite ongoing stimulus efforts.
Outlook for Recovery
While challenges persist, analysts see room for optimism. Finance cost pressures are expected to peak by mid-2025, with significant recovery likely in the latter half of the year as interest rates ease. S-REITs with a lower proportion of fixed-rate loans are particularly well-positioned to benefit.
Natarajan noted that long-term recovery trends remain intact, particularly for sectors like data centres and logistics, which continue to capitalize on the rise of artificial intelligence and e-commerce.
The Bottom Line
For now, patience is key for S-REIT investors. With operational performance holding steady and pockets of growth emerging, the sector’s long-term recovery remains a question of “when,” not “if.” However, near-term challenges mean investors must brace for a slower-than-expected path to recovery.
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