Singapore Real Estate Investment Trusts (S-REITs) Set to Outshine Local Banks as US Interest Rates Decline
Singapore’s property owners may soon emerge from the shadow of the country’s banking giants, as the US Federal Reserve signals a monetary easing cycle. Federal Reserve Chairman Jerome Powell’s indication that interest rate cuts may begin next month has set the stage for a potential resurgence in the performance of Singapore’s REITs (Real Estate Investment Trusts).
For years, Singapore’s three major banks—DBS, OCBC, and UOB—have basked in the spotlight, boosted by high net interest margins. In 2024, these banks collectively distributed an impressive S$11.3 billion in dividends, double their payout in 2020. However, with interest rates expected to drop, the banks may face narrower margins and higher provisions for bad loans. This shift offers S-REITs an opportunity to shine.
REITs Ready to Rebound
In contrast to the banks’ robust dividends, REITs have struggled in recent years. Burdened by elevated post-pandemic financing costs, the annual distributions of Singapore’s REIT index members hovered between S$5 billion and S$5.5 billion over the last three years, modestly exceeding pre-pandemic levels. OCBC analysts note that property owners have faced significant asset impairments, particularly for overseas properties.
However, as borrowing costs decline, REITs stand to gain. Lower financing expenses mean more rental income will flow directly to investors, with analysts projecting a 2.9% rise in per-unit payouts for median S-REITs in the next financial year.
Diverse Portfolios, Global Appeal
S-REITs offer investors exposure to a wide variety of rental income streams, from Japanese nursing homes to US data centers and grocery stores. For example, healthcare-focused Parkway Life REIT recently acquired a nursing home in Japan’s Osaka Prefecture, targeting the country’s aging population.
Even REITs with exposure to struggling markets, like the US office segment, are finding silver linings. Prime US REIT has recently improved occupancy rates at its Virginia office building to 61% from 47% and refinanced a credit facility. Meanwhile, United Hampshire US REIT, anchored by shopping centers and self-storage outlets, secured a 10-year lease with retailer Dick’s Sporting Goods.
Retail and Hospitality Still Thriving
Closer to home, Singapore’s retail and hospitality REITs continue to benefit from strong economic fundamentals. The government’s GDP growth forecast of 2% to 3%, coupled with low unemployment and steady tourist arrivals, creates favorable conditions for landlords. VivoCity, owned by Mapletree Pan Asia Commercial Trust, signed new retail leases at a 20% premium to expiring agreements last quarter.
In Hong Kong, where Chinese visitors are fueling recovery, Festival Walk mall secured new leases at only a 5% discount—a promising sign amidst regional economic headwinds.
A Historical Advantage
Past trends reinforce optimism for S-REITs. According to OCBC, Singapore property owners have historically outperformed the Straits Times Index during periods of falling long-term local interest rates. Despite the cooling of 10-year Singapore government bond yields since their October 2022 peak, S-REITs have yet to see a significant rally—a trend likely to reverse once US interest rates start declining.
The Changing Landscape
The impending shift in monetary policy marks a potential inflection point for Singapore’s financial landscape. While banks may retreat from their current heights, landlords are poised to step into the limelight, offering investors a renewed growth story driven by lower costs, diversified assets, and stable yields.
The stage is set for a significant shift: as short-term US rates decline, Singapore’s REITs are ready to lead the charge, leaving the banks to contend with the headwinds of a changing economic environment.
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