Singapore REITs Remain Defensive Amidst Market Volatility

OCBC Investment Research | 8 April 2025
Sector Update: Singapore REITs – Defensive but Not Without Risks

Key Takeaways:

S-REITs have outperformed broader market indices amid global market turmoil, driven by a flight to defensive sectors and institutional inflows.
Declining benchmark interest rates, particularly in Singapore, bode well for S-REITs’ distribution per unit (DPU) outlook, though rental income may face pressure.
Valuations appear attractive from a historical price-to-book and dividend yield perspective, but S-REITs are not immune to recessionary risks.
Selective stock-picking focusing on quality S-REITs with DPU growth potential, strong sponsors, healthy financials, and Singapore asset exposure is recommended.
Top picks include CLAR, CICT, KDCREIT, and PREIT.

Defensive Positioning Amid Market Volatility

Amidst the recent market turmoil and volatility triggered by the announcement of new US tariffs, the Singapore REIT (S-REIT) sector has stood out, with share prices holding up relatively better than broader indices. This outperformance can be attributed to two key factors:
The expectation of more rate cuts from the Federal Reserve (Fed) due to global economic growth concerns, which has adversely impacted sentiment towards Singapore banks and triggered a rotation into the more defensive S-REIT sector.
Institutional investors have turned net buyers of S-REITs for four out of the five trading weeks from 3 March to 4 April 2025, marking a reversal of the outflows experienced for much of 2024.

Declining Benchmark Rates Boost DPU Outlook

The rising risks of a US and global recession have driven a meaningful pullback in benchmark interest rates of countries/regions where S-REITs have larger exposures, apart from Japan. The dip in interest costs has been steeper for Singapore, which augurs well for the borrowing cost and DPU outlook of S-REITs with sizeable Singapore asset exposure.
However, S-REITs under coverage have, on average, hedged 75% of their borrowings as of 31 December 2024, meaning the decline in spot interest rates would not translate to a corresponding decline in borrowing costs of the same magnitude at the onset.

Valuations Appear Attractive, But Risks Remain

From a valuation perspective, the S-REIT sector appears attractive. The distribution yield spread of the iEdge S-REIT Index stood at 431 basis points as of 7 April 2025, which is 0.8 standard deviations above the 8-year average of 386 basis points. The index also trades at a forward price-to-book ratio of 0.80x, which is 1.9 standard deviations below the 8-year average of 0.98x.
However, S-REITs are not immune to macroeconomic vagaries. A slowdown in the US economy is likely to have spillover effects on the global economy, and Singapore will likely face significant second-order impact given its open economy and reliance on exports. Recessionary fears may prompt consumers to tighten their wallets and cut back on discretionary spending, which could hurt retailers and hotels. Corporates may also turn more cautious and consolidate their office space requirements, driving a continued flight to quality.

Selective Stock Picking Recommended

Given the mixed outlook, a selective stock-picking approach focusing on quality S-REITs is recommended. Investors should seek out S-REITs that can exhibit DPU growth, are backed by strong sponsors, are in strong financial positions, have healthy weighted average lease expiry (WALE) terms, and ideally have some Singapore asset exposure.
OCBC’s top picks in the S-REIT space are:
CLAR [CLAR SP; FV: SGD3.30]
CICT [CICT SP; FV: SGD2.35]
KDCREIT [KDCREIT SP; FV: SGD2.43]
PREIT [PREIT SP; FV: SGD4.60]