Singapore REITs: Quality Focus Amidst Mixed Outlook – Top Picks & Analysis (May 2025)

OCBC Investment Research

15 May 2025

Singapore REITs: A Quality-Focused Strategy Amidst a Mixed Outlook

Investment Summary: Navigating the S-REIT Landscape

Following the market’s initial overreaction to US President Trump’s ‘Liberation Day’ tariff announcements on 2 Apr 2025, Singapore REITs (S-REITs) have demonstrated a notable rebound, mirroring global equity trends. This recovery was further bolstered by the US and China agreeing to roll back a significant portion of their tariffs for 90 days to facilitate ongoing trade negotiations. As of 14 May 2025, the FTSE ST All-Share REITs Index (FSTREI) has achieved a year-to-date (YTD) total return of 0.4%, a significant recovery from a previous low of -6.2%, although it has not yet reached pre-‘Liberation Day’ levels. [[1]]

However, the FSTREI’s performance lags behind the Straits Times Index and the MSCI Singapore Index, which have delivered total returns of 4.3% and 11.0% YTD, respectively. [[1]]

First-quarter 2025 results revealed that among the S-REITs under coverage, 10 reported distribution per unit (DPU) data, with seven meeting expectations, one exceeding, and two falling short. Despite most results aligning with forecasts, overall DPU decreased by 2.8% year-on-year (YoY) on average and 1.7% on a median basis. Consequently, DPU forecasts have been adjusted downward by 1.4% for both FY1 and FY2 on average, with median forecasts reduced by 0.4% for FY1 and 0.1% for FY2. [[1]]

The revised expectations project an average DPU growth of -0.9% for FY1, followed by a recovery to 4.4% in FY2, predicated on lower borrowing costs and the avoidance of a global recession. These forecasts are slightly below street consensus for FY1 (0.4% average, 0.3% median) but above for FY2 (0.3% average, 0.5% median). [[1-2]]

Valuation and Yield Analysis

Despite the rebound from tariff-induced lows, the price-to-book (P/B) multiple for S-REITs, based on the iEdge S-REIT Index, remains at 0.82x as of 14 May 2025, which is 1.7 standard deviations below the 8-year average of 0.98x. The iEdge S-REIT Index offers a 12-month forward distribution yield of 6.5%, 0.9 standard deviations above the 8-year average of 6.1%. With the 10-year Singapore government bond yield at 2.57% as of 14 May 2025, the distribution yield spread of the iEdge S-REIT Index stands at 395bps, 0.2 standard deviations above the 8-year average of 386bps and significantly higher than the 3-year average of 349bps. [[2]]

Sector Preferences and Investment Strategy

The preferred sub-sectors, ranked from most to least favored, are retail, logistics and industrial (with data centers as the top choice within this segment), office, and hospitality. S-REITs offer a degree of defensiveness due to locked-in leases that provide stable cash flows, and some leases include rental escalation clauses linked to inflation. [[2]]

• Investors should assess the weighted average lease expiry (WALE) and lease expiry profile of S-REITs to evaluate potential leasing risks. [[2]]
• S-REITs are not immune to macroeconomic factors, as real estate asset classes are susceptible to consumer and business confidence. [[2-3]]
• Factors such as real estate consolidation and delays in lease signings can negatively impact S-REITs. [[3]]
• Critical considerations include the quality of the asset portfolio, geographical location, track record, and balance sheet strength. [[3]]

Recommended Approach: Selective Stock-Picking

A selective, quality-focused stock-picking approach is recommended, favoring S-REITs with DPU growth potential and strong sponsor backing. These S-REITs should have strong financial positions, healthy WALE terms, and significant Singapore asset exposure, benefiting from the resilience of local capital values and the recent decline in the Singapore Overnight Rate Average (SORA), which reduces borrowing costs in SGD. [[3]]

Top S-REIT Picks

• CapitaLand Ascendas REIT (CLAR) [CLAR SP; FV: SGD3.21]: [[3, 13]]
• CapitaLand Integrated Commercial Trust (CICT) [CICT SP; FV: SGD2.35]: [[3, 13]]
• Keppel DC REIT (KDCREIT) [KDCREIT SP; FV: SGD2.35]: [[3, 13]]
• Parkway Life REIT (PLIFE) [PREIT SP; FV: SGD4.65]: [[3, 13]]

Mapletree Logistics Trust (MLT) [MLT SP; FV: SGD1.47]: While macroeconomic uncertainties and expected economic slowdown in China pressure MLT’s fundamentals, its negatives are believed to be priced in, presenting value at current valuations. The stock trades at a FY26 distribution yield forecast of 7.0%, 1.2 standard deviations higher than its 10-year mean of 5.8%. Its forward P/B multiple of 0.86x is significantly below its 10-year average of 1.17x. De-escalation of trade tensions between China and the US could catalyze a tactical rebound in MLT’s share price. [[3, 13]]

Sub-Sector Preferences

The preference order for major S-REIT sub-sectors remains: [[3]]

1. Retail
2. Logistics and Industrial (data centers preferred)
3. Office
4. Hospitality

Market Dynamics and Fund Flows

The S-REITs sector experienced net outflows of SGD494.7m YTD (week of 6 Jan to week of 5 May) from institutional investors, according to data from the Singapore Exchange. During periods of heightened tariff uncertainties and increased market volatility in April 2025, the S-REITs sector saw net outflows, suggesting institutional investors sought shelter in sectors such as telcos, consumer non-cyclicals, and even the industrial sector. However, there were net inflows into S-REITs in the weeks of 28 Apr and 5 May 2025, alongside inflows into industrials, telcos, consumer cyclicals, and real estate excluding REITs. [[4]]

Key Signposts and Monitoring

Critical factors to monitor include: [[4-5]]

• Developments in trade talks between the US and its trading partners
• Potential adverse impacts of tariffs on consumer and business confidence
• Effects on leasing decisions, occupancy, and rental rates of S-REITs
• Inflationary trends
• The trajectory of the fed funds rate
• Movements in 10-year US Treasury (UST) yields and 10-year Singapore government bond yields

1Q25 Results Review: DPU Under Pressure

The S-REITs under coverage reported their 1Q25 results, with 10 reporting DPU data. Seven were in line with expectations, one exceeded, and two fell short. Overall, DPU fell 2.8% YoY on average and 1.7% on a median basis. Five S-REITs recorded YoY DPU declines, four increased, and one was flat. Mapletree Pan Asia Commercial Trust (MPACT), Frasers Logistics & Commercial Trust (FLT), and Mapletree Logistics Trust (MLT) registered double-digit YoY DPU declines due to higher borrowing costs, unfavorable FX movements, absence of income from asset divestments, and a larger proportion of management fees taken in cash. [[5]]

Broader trends included weaker occupancy, particularly in the industrial and office sectors, while rental reversions remained mostly robust but are expected to moderate. Revenue per available room (RevPAR) trends in Singapore were down YoY, partly due to high-profile concerts in 1Q24, affecting hospitality S-REITs with local concentration. [[5]]

DPU Forecasts: Decline in FY1, Recovery in FY2

DPU forecasts have been adjusted by -1.4% for both FY1 and FY2 on average, with median forecasts lowered by 0.4% for FY1 and 0.1% for FY2. S-REITs are expected to record -0.9% in DPU growth on average for FY1, followed by a recovery of 4.4% on average in FY2, driven by lower borrowing costs and the assumption of no global recession. FY1 and FY2 DPU forecasts are 0.4% (average) and 0.3% (median) below street consensus for FY1, but 0.3% (average) and 0.5% (median) above for FY2. [[5-6]]

Sub-Sector Performance Analysis

Retail Sector

Singapore retail assets remained resilient with positive rental reversions, ranging from 4.9% for OUE REIT’s Mandarin Gallery to 16.8% for Mapletree Pan Asia Commercial Trust’s VivoCity. Most S-REITs maintained near-full occupancy for retail operations, though Suntec REIT’s Marina Bay Link Mall lagged at 96.5%. Properties levered to hospitality, such as those in Starhill Global REIT and SUN’s portfolios, experienced lower shopper traffic and tenant sales YoY. [[6]]

Properties in China and Hong Kong showed relatively soft performance, but rental reversions appear to have inflected upwards. CapitaLand China Trust (CLCT) posted slightly positive reversions of +0.5%, versus -1.1% in FY24. Negative rental reversions for MPACT’s Festival Walk property in Hong Kong eased from -7.2% for 9MFY25 to -6.9% for FY25. Despite positive YoY shopper traffic growth, tenant sales declined. [[6]]

Singapore’s retail market enjoyed healthy leasing demand in 1Q25, driven by F&B operators. Prime island-wide retail rents rose 0.6% QoQ, and CBRE Research expects this to recover to pre-pandemic levels this year. [[7]]

Industrial Sector

Industrial S-REITs delivered robust rental reversion figures, ranging between +4.9% and +33.0% from 1 Jan to 31 Mar 2025. Rental reversions are likely to moderate as leases signed during the pandemic have mostly been renewed. CLAR and Mapletree Industrial Trust (MINT) registered sequential dips in overall portfolio occupancy, but remained above 90%. MINT expects some weakness in its North American portfolio and may divest SGD500-600m of properties. [[7]]

JTC’s Rental Index of All Industrial Space rose 0.5% QoQ in 1Q25. Australia’s core logistics markets recorded YoY/QoQ market rental growth. Australia’s industrial and logistics market vacancy rates remain low, with signs of yield compression, particularly in Sydney and Brisbane. [[7]]

Office Sector

Singapore’s core CBD Grade A office rents returned to positive sequential growth, rising 0.8% QoQ to SGD12.05 psf per month in 1Q25. Flight to quality was a key theme, supported by increased absorption at IOI Central Boulevard Towers. Core CBD Grade B office rents also saw an uptick. [[8]]

Office S-REITs delivered healthy rental reversions for their Singapore office portfolios. CICT, Keppel REIT (KREIT), MPACT, OUEREIT, and SUN reported rental reversions of 5.4%, 10.6%, 2.2%-7.4%, 9.9%, and 8.0%, respectively. Rental reversions are expected to ease in the near-to-medium term. Stoneweg European REIT (SERT) recorded rental reversions of -0.6% for its office portfolio, while MPACT faced challenges in overseas commercial markets. [[8]]

Hospitality Sector

Visitor arrivals to Singapore for the first three months of 2025 were flat YoY at 4.3m. Tourist arrivals rebounded in Apr, rising 4.5% YoY to 1.4m arrivals. Visitor arrivals for the first four months of the year are tracking at ~91% of pre-Covid levels, while China as a source market has recovered to ~82%. [[9]]

RevPAR fell 14.4% YoY to SGD208 in March, driven by declines in occupancy and average room rates, but remained 15% above pre-pandemic levels. S-REITs with hospitality exposure saw their Singapore portfolios turn in a lacklustre set of operating metrics. CapitaLand Ascott Trust (CLAS) benefited from portfolio reconstitution, and OUE REIT’s Crown Plaza Changi Airport services a different clientele. [[9]]

Hospitality is the least preferred sub-sector. Quality names like CLAS are preferred due to their geographically diversified portfolio, exposure to rental housing and student accommodation, and lease structures with minimum guaranteed income. [[10]]

Healthcare Sector

PLIFE and First REIT’s (FIRT) 1Q25 results were in line with expectations. PLIFE’s distributable income (DI) grew 9.1% YoY on contributions from newly acquired nursing homes. FIRT continued to suffer from FX headwinds. [[10]]

Investors can consider adding defensiveness to their portfolios by gaining exposure to healthcare S-REITs, given the counter-cyclical demand for healthcare assets and long WALE. PLIFE is the preferred play in this space. [[10]]

Debt Profile and Borrowing Costs

There was a slight sequential decline in borrowing costs for most S-REITs. The average cost of debt decreased QoQ due to recent dips in benchmark interest rates. However, Stoneweg European REIT (SERT) saw a significant jump after refinancing a bond. Overall, 11 S-REITs recorded a sequentially lower debt cost, three were unchanged, and four rose QoQ. [[11]]

Weighted average debt to maturity profiles were stable at 3.2 years. Interest coverage ratio (ICR) was healthy at 3.6x. The average aggregate leverage ratio increased to 39.3%. REIT managers are expected to remain opportunistic on capital recycling activities. [[11]]

Table of Debt Profile and Statistics of S-REITs Under Coverage (as at 31 Mar 2025): [[12]]

Sector Valuations and Investment Recommendations

S-REIT valuations remain undemanding, with a P/B multiple of 0.82x as of 14 May 2025, 1.7 standard deviations below the 8-year average. The iEdge S-REIT Index trades at a 12-month forward distribution yield of 6.5%, 0.9 standard deviations above the 8-year average. The distribution yield spread is 395bps, 0.2 standard deviations above the 8-year average. [[13]]

The recommendation is to continue a selective stock-picking approach, focusing on quality S-REITs with DPU growth, strong sponsors, solid financial positions, healthy WALE terms, and significant Singapore asset exposure. [[13]]

Table of Most Preferred S-REIT Picks: [[13]]

Historical P/B and Distribution Yield Trends: [[14-15]]

Historical trends of forward P/B ratio and distribution yield of iEdge S-REIT Index, along with distribution yield spread between iEdge S-REIT Index and 10Y Singapore government bond yield, indicate sector valuation context. [[14-15]]