The Singapore market surged to a 17-year high today, with the Straits Times Index (STI) climbing nearly 20% year-to-date. This stellar performance outpaces most regional markets and is driven by gains in the financial sector, including the three major banks and Singapore Exchange, as investors anticipate outcomes from an ongoing market review.
While several stocks hit or neared their 52-week highs, real estate investment trusts (REITs) remained under pressure, trading at valuations roughly 10% above their lows. The REIT sector has been weighed down by shifting expectations around interest rate cuts, which have significantly influenced bond yields.
Earlier optimism for up to six rate cuts by 2025 waned as bond yields climbed, with the 10-year yield hovering near 4.5%. Market players now expect just two rate cuts by 2025, leading to renewed pressure on REIT prices.
However, Gerald Wong, CEO of investment platform Beansprout, sees opportunity amid these challenges. Speaking to The Edge Singapore, Wong noted that current conditions create an “interesting risk-reward profile” for savvy investors in Singapore’s REIT market.
Market Shifts Open Opportunities for Select REITs
According to Wong, the ability of individual REITs to enhance their portfolios or engage in capital management initiatives will be critical. He cited recent acquisitions by CapitaLand Integrated Commercial Trust (C38U) and Keppel DC REIT as evidence that REIT managers are capitalizing on signals that interest rates have peaked.
“For managers, the certainty around rates provides clarity for pricing transactions,” said Wong. While rates may not fall sharply, the stabilization allows REITs to plan acquisitions or asset enhancements, which can boost distributions.
Wong emphasized that investors should focus on REITs capable of maintaining or growing their distributions even amid modest rate movements. He identified three standout REITs with promising risk-reward profiles: OUE REIT, Elite UK REIT, and AIMS APAC REIT.
OUE REIT: Undervalued with Growth Potential
OUE REIT (TS0U) has undertaken significant asset enhancement initiatives in recent years, including upgrading Hilton Singapore Orchard and Crowne Plaza Changi Airport. Wong believes these improvements are not fully priced in, leaving room for growth in net property income.
Trading at below half its book value, OUE REIT faces concerns over office market oversupply. However, Wong argued that the REIT offers an attractive risk-reward balance, with a higher yield compared to its peers. His target price for OUE REIT is 32 cents.
Elite UK REIT: Unlocking Value Through Strategic Divestments
Elite UK REIT is unique among Singapore-listed REITs for its UK-centric portfolio. Recent divestments, such as the sale of Hilden House at a 6% premium to valuation, highlight the manager’s focus on capital management.
While the UK’s economic outlook raises questions, Wong believes these risks are already priced in, as the REIT offers a 10% yield. He also noted the UK and European markets have already begun rate cuts, providing stability for asset valuations. Wong’s target price for Elite UK REIT is GBP0.44.
AIMS APAC REIT: Resilient Growth in Logistics and Industrial Sectors
AIMS APAC REIT stands out for its strong portfolio, which spans logistics, business parks, and high-tech properties in Singapore and Australia. The REIT posted robust rental reversions, with logistics leases achieving a 28.1% increase.
With ongoing asset enhancements at properties like 15 Tai Seng Drive and 7 Clementi Loop, Wong sees continued upside for rental income and distributions. AIMS APAC REIT also benefits from a relatively stable valuation compared to other REITs. Wong has set a $1.43 target price for this counter.
Stable Interest Rates Key to REIT Market Revival
For REITs to thrive, stability in interest rates is paramount. Wong noted that the focus has shifted from how sharply rates might be cut to certainty around rates peaking. “If we have continued certainty, that’s sufficient to unlock more transactions,” he said.
Wong advised investors to seek REITs with growth potential in distributions, either through asset enhancements or disciplined capital management, ensuring resilience even if rate cuts are less aggressive than previously anticipated.
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