S-REITs Poised for a Rally as Interest Rates Fall, But Risks Remain
SINGAPORE – With declining interest rates and strong liquidity, Singapore Real Estate Investment Trusts (S-REITs) are gaining traction as attractive yield plays. The yield on 10-year Singapore Government Securities (SGS) has fallen to 2.62% as of March 10, its lowest level in five months and near a three-year low. Meanwhile, the FTSE REIT Index’s yield stands at 6.5%, creating a 3.9% yield spread—a gap that historically leads to an S-REIT price rally.
Interest Rates Declining: A Boost for REITs
Market analysts expect further rate cuts, making REITs more appealing:
- DBS Group Research notes that one-month Sora (Singapore’s benchmark rate) has peaked in FY2024, currently stabilizing between 2.4% and 2.5%.
- JP Morgan has upgraded REITs to Overweight while downgrading banks to Neutral, citing a 100bps drop in Singapore interest rates over recent weeks.
- JP Morgan projects a 15% upside for S-REITs compared to their September 2024 highs, when the risk-free rate was at its lowest in a year.
JP Morgan’s Top S-REIT Picks
JP Morgan is favoring Singapore-focused REITs with solid fundamentals, including:
CapitaLand Integrated Commercial Trust (CICT) CapitaLand Ascendas REIT (CLAR) Keppel DC REIT Frasers Centrepoint Trust (FCT) Mapletree Logistics Trust (MLT)
These REITs are expected to benefit the most from falling borrowing costs and resilient demand for commercial and industrial spaces.
Borrowing Costs Expected to Decline
JP Morgan predicts that S-REIT borrowing costs will trend lower, particularly benefiting:
CDL Hospitality Trusts – Due to its high proportion of floating rate debt. Frasers Centrepoint Trust – With a large share of SGD-denominated debt, it may see borrowing costs fall below management’s guidance.
Additionally, S-REIT bond coupons have dropped to 3.2%, a three-year low, while yields at 6.3% make them more attractive than bank dividend yields at 6.2%.
Rate Cuts Still Uncertain Amid Inflation Concerns
While S-REITs stand to gain, DBS warns of risks, particularly persistent inflation and trade uncertainties:
- Expectations for Fed rate cuts have fluctuated, with markets now pricing in two to three cuts by the end of 2025.
- U.S. trade tariffs and economic uncertainties could rekindle inflation fears, impacting business growth and economic stability.
The Outlook: REITs vs. Other Investments
Alternative income sources, such as six-month Singapore Treasury Bills (T-bills) at 2.75%, have seen rates decline, making REITs more attractive in comparison.
If the yield spread continues to widen, a short-term S-REIT price rally is likely.
However, investors should remain cautious as economic volatility and inflation concerns persist. For now, falling rates provide a strong tailwind for S-REITs, making them one of the more attractive yield plays in the Singapore market.
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