Data centres the standout performers among S-Reits in Q3; analysts have mixed views on the sector overall for Q4
Singapore-listed Reits report healthy operational performance, even as they face pressure from higher interest rates
DATA centres turned out to be the surprise package in what was otherwise an expected financial performance posted by Singapore-listed real estate investment trusts, or S-Reits, in the third quarter ended September.
Data centre assets posted “exceptionally strong” rental reversion figures, said RHB analyst Vijay Natarajan.
In particular, he pointed out the example of Keppel DC Reit , which renewed a major contract with a positive rental reversion of more than 40 per cent.
Otherwise, earnings of S-Reits for the quarter were mostly within expectations, with a healthy operational performance even as they continued to face cost pressures from higher interest rates.
Maybank Securities analyst Krishna Guha noted that rental reversions continue to be positive on a year-to-date basis, although the repricing of debt and foreign exchange headwinds continue to have an impact on financing expense and net asset values.
Most S-Reits released business updates rather than full financial statements for their Q3 earnings, meaning that not all of them disclosed information relating to their distribution per unit (DPU) or distributable income.
Nevertheless, data compiled by The Business Times showed that DPU and distributable income continued to fall for the majority of S-Reits that reported their figures.
Out of the 17 S-Reits and property trusts that disclosed their distributable income, 11 posted lower distributions. Among the 10 S-Reits and property trusts that reported their DPU, the results were evenly divided between those that posted higher and lower DPU for the financial period.
Hospitality sector
For Natarajan, the slowing growth in the hospitality sector also came as a “negative surprise”. The analyst had anticipated revenue per available room, or RevPar, for hospitality players such as CDL Hospitality Trusts , OUE Reit and Frasers Hospitality Trust to be “more flattish” year on year rather than negative in Q3.
The 2025 guidance for these Reits was also below RHB’s expectations, said Natarajan.
Similarly, Darren Chan, a senior research analyst at Phillip Securities Research, observed that the year-on-year growth in the hospitality sector is slowing. The sector’s Q3 RevPar also moderated to a single-digit increase, following the high base in 2023 when the sector saw double-digit growth.
Weakness in Mapletree Pan Asia Commercial Trust’s (MPACT) Japan office assets was also unexpected this quarter, added Natarajan.
The analyst said that the market had not anticipated the exit of MPACT’s tenant in its Makuhari assets and the corresponding drop in asset valuations. The exit of tenants in the Makuhari market added an additional challenge to MPACT, which is already facing challenges in the Hong Kong and China markets, noted Natarajan.
Outlook
Chan expects S-Reits to turn the corner in the coming quarter, with those that have a lower proportion of fixed-rate loans more likely to report DPU increases.
However, Natarajan was of the view that S-Reits’ DPU will remain under pressure in the coming quarter, due to a lag effect from interest rate cuts.
Finance cost pressures, though, are expected to peak by the first half of next year, with the positive effects on DPU and net asset value becoming more evident in the second half of 2025, he added.
In the longer-term, S-Reits are expected to recover more substantially in 2025 with lower interest rates.
However, analysts pointed out that the pace of the Reits’ recovery is likely to be slower than previously expected following the re-election of former United States president Donald Trump. They expect interest rate cuts by the US Federal Reserve to slow under a Trump presidency.
“If it pans out, it would mean S-Reits’ headwind from financing expenses will be drawn out, unless offset by pro-growth policies,” said Maybank’s Guha.
In terms of asset valuations, Chan said that commercial properties in the US and Australia are likely to see their valuations decline at the end of this year due to weaker operating performance and increase in capitalisation rates.
Similarly, for China assets, valuation declines are expected across most sectors, driven by weak operating performance.
