As the earnings season for Singapore-listed real estate investment trusts (S-REITs) kicks off this week, all eyes are on how these trusts have navigated the challenges of rising financing costs and volatile interest rates. The reporting period coincides with two major global developments: Donald Trump’s inauguration as U.S. President and the U.S. Federal Reserve’s highly anticipated interest rate decision at the Federal Open Market Committee (FOMC) meeting later this month.
The Interest Rate Dilemma
For the past two years, higher interest rates have eroded S-REIT distributions, although the Federal Reserve began cutting rates in 2024. However, analysts warn that Trump’s forthcoming policies, widely regarded as inflationary, could slow the pace of future rate cuts. This could prolong the challenges faced by S-REITs.
Still, industry experts believe the worst may be over. “Most S-REITs are already at or near peak interest rates, and we expect financing costs to decline starting this year,” said DBS analyst Derek Tan. He emphasized that key metrics such as gearing ratios, debt costs, and interest coverage ratios will be critical to watch in the upcoming results.
Predicted Performance: Decline and Stability
Maybank analyst Krishna Guha forecasts a 3% year-on-year decline in total S-REIT distribution for the fourth quarter of 2024. He attributes this to a moderation in the hospitality sector from a high base the year prior and ongoing operational challenges in the industrial sector.
RHB analyst Vijay Natarajan expects 2025 to bring recovery but warns of a “choppy” first half as markets adjust to Trump’s policies and their impact on inflation. However, he noted that stabilizing interest rates could help valuations recover, with net asset values better reflecting the long-term value of REITs.
Key Announcements and Results Schedule
The reporting season is packed with crucial updates:
Jan 21: Mapletree Logistics Trust (MLT) reports Q3 results.
Jan 22: Mapletree Industrial Trust (MIT) and Frasers Centrepoint Trust release Q3 and Q1 results, respectively.
Jan 23: Mapletree Pan Asia Commercial Trust (MPACT) reports Q3 results.
Jan 24: Keppel DC REIT discloses FY2024 results.
Jan 27: CDL Hospitality Trusts (CDLHT) and Keppel REIT release FY2024 results.
Feb 5: CapitaLand Integrated Commercial Trust (CICT) announces FY2024 results.
Feb 6: CapitaLand Ascendas REIT (CLAR) wraps up the season with its FY2024 announcement.
Financing Costs Under the Microscope
While higher borrowing costs have hurt REITs over the past two years, analysts believe the sector is turning a corner. Rachel Tan, a Macquarie Capital research analyst, noted that most S-REITs completed their refinancing needs in 2024, limiting exposure to refinancing and foreign exchange risks in Q4.
Exceptions include CDLHT and CLAR, which had 20% and 10% of their debt, respectively, due for refinancing in the quarter. Additionally, S-REITs with significant exposure to Japan—such as MLT, MPACT, and CapitaLand Ascott Trust—may face challenges from yen depreciation.
Focus on Asset Valuations and M&A
Beyond financing costs, analysts will closely monitor the impact of interest rates on asset valuations. “We expect Singapore portfolios to hold up well and possibly trend higher, given strong reversions across asset classes,” said Tan. She believes asset valuations are bottoming out, driven by early signs of rate cuts in many countries.
Mergers and acquisitions (M&A) are another area to watch. Morningstar analyst Xavier Lee predicts a favorable environment for both divestments and acquisitions, noting that REITs looking to deleverage or offload non-core assets should find it easier to secure buyers.
A Better Year Ahead?
Looking forward, DBS analysts project a 3.4% rebound in distribution per unit (DPU) growth for S-REITs in FY2025 and FY2026. They estimate that a 1% drop in interest rates could lead to a 2.5% rise in DPU, offering hope for a sector that has struggled with the weight of rising financing costs.
As markets brace for potential volatility stemming from Trump’s policies and global economic conditions, S-REITs are positioned for a recovery. However, success will hinge on how effectively they manage costs, enhance valuations, and seize opportunities in a changing financial landscape.
Among the top performers, Parkway Life REIT emerges as a “dark horse,” with the potential for a significant 20% jump in its DPU by FY2026 after a master lease reset. This reset is expected to elevate yields beyond historical averages, cementing Parkway Life REIT’s place as a standout opportunity in the sector.
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