Analysts positive on S-Reits in 2025 after a roller-coaster year

SINGAPORE-LISTED real estate investment trusts (S-Reits) endured quite a roller-coaster year in 2024.

What began as an optimistic year for the Reit sector, fuelled by hopes of interest rate cuts, shifted to one of uncertainty, due to concerns about a potential slowdown in rate cuts under the incoming Donald Trump administration in the US.

The sector, represented by the iEdge S-Reit Index, is down 11.3 per cent. Even with distributions reinvested, it generated a total return of -5.6 per cent.

The sector’s unit price performance in 2024 has been “disappointing” compared with initial expectations of a stronger rally in the second half of the year from the commencement of rate cuts, said RHB analyst Vijay Natarajan.

“While S-Reits broadly outperformed our and market expectations on the operational front in 2024, distribution per unit (DPU) and net asset value continue to remain under pressure on the back of higher interest rates,” he added.

Operating statistics for the Singapore market have also worsened, said Maybank Securities analyst Krishna Guha. For instance, rental reversions have moderated, while frictional vacancies – which refer to the level of vacancy inherent in the market – have remained sticky.

Top and bottom Reit performers

Several overseas-focused Reits landed among the top performers for 2024. They include Manulife US Reit (MUST), which outperformed this year after a steep decline in its valuation in 2023, as well as Cromwell European Reit and data centre-focused Keppel DC Reit.

Several other US-focused Reits such as Keppel Pacific Oak US (Kore) and Acrophyte Hospitality Trust (AHT) rounded up the bottom performers alongside Europe-focused IReit Global.

RHB’s Natarajan suggested that MUST’s outperformance in 2024 could have been due to its low base.

The US office Reit’s unit price plummeted in 2023 after it breached its gearing limits and loan covenants. This resulted in a halt of its dividend distributions. However, MUST’s unit price recovered in 2024, as leasing activity for office spaces in the US improved.

On the other hand, the market was not expecting a similar halt in distributions for Kore and cut in distributions for Prime US Reit in 2024, as both had relatively better-positioned balance sheets compared with MUST.

“Thus, the sudden announcement of distribution halts or cuts by these Reits... came as a surprise and resulted in a steep decline in (unit) prices earlier this year,” said Natarajan.

In the case of AHT, its underperformance is due to a combination of softening in hospitality market conditions in the US, and a steep increase in its borrowing costs, he added.

What to expect in 2025

Analysts believe that S-Reits will have a better year in 2025, with interest rates likely to fall.

Natarajan said that interest cost pressures are expected to peak by the first half of 2025, resulting in a turnaround for Reits’ DPUs by the second half of the year.

Despite concerns that a second Trump presidency would slow rate cuts, Ritesh Ganeriwal, head of investment and advisory at wealth management platform Syfe, believes that there is still room for rates to fall.

For one thing, the Trump administration has a preference for lower interest rates. The US Federal Reserve is also likely to cut rates further to support the growth of the US economy. Globally, central banks are also easing their rates.

“With this favourable rate environment, we believe S-Reits are well-positioned to benefit... barring an (economic) slowdown or recession,” said Ganeriwal.

What this means for investors

With S-Reits delivering yields of around 6 per cent, higher than the 3 per cent offered by the six-month Singapore Treasury bill yield as at December 2024, S-Reits are a “compelling” investment choice in a lower-interest-rate environment, said Ganeriwal.

Among the subsectors that stand to benefit from continued rate cuts are the industrial, retail and hospitality sectors, said Maybank’s Guha.

Some sector-wide trends from 2024 will continue in 2025, said RHB’s Natarajan. This includes the rising prominence of data centres as an asset class, given the growing interest in artificial intelligence. Office Reits will also benefit as more employers recall their staff to office, he added.

Syfe’s Ganeriwal said that he was most positive about the outlook for the retail subsector. Retail rents have continued to recover due to demand from global and niche retailers, such as food and beverage operators, beauty brands and collectible stores.

The retail sector also has a supply pipeline which is below the historical pipeline. This will contribute to the subsector’s rental stability and growth, he added.