Analysts positive on S-Reits on prospect of more rate cuts, give top picks
Expected US rate cuts of 125 basis points from September 2025 to March 2026 ‘augur well’ for S-Reits, says Citi
[SINGAPORE] Further US Fed interest rate cuts are widely expected, which would be a positive sign for Singapore’s real estate investment trusts (S-Reits), said analysts.
The current rally is supported by September’s 25-basis-point cut – the first cut since December, with US President Donald Trump pushing for a lower-rate regime.
Citi economists said they expect further cuts of 125 basis points from September 2025 to March 2026, which “augur well” for S-Reits.
Morningstar pointed to S-Reit performance moving inversely to Singapore’s 10-year government bond yields, which declined from 2.87 per cent at the start of the year to 1.91 per cent as at Sep 30. Real estate yields are expected to remain stable or tighten slightly in the near term, supported by the recent decline in bond yields, it added.
S-Reits’ valuation forecasts of 5.4 per cent for 2025 and 5.7 per cent for 2026 imply yield spreads of about 3.7 and 3.9 per cent over 10-year bond yields of about 1.8 per cent, said Citi.
It added that S-Reits with greater domestic exposure are expected to fare better than those without, driven by “significantly softer” three-month Singapore Overnight Rate Average (Sora) and the stronger Singapore dollar.
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The three-month compounded Sora fell from 3 per cent on Jan 3 to under 1.5 per cent as at Wednesday (Oct 1), while the Singapore dollar has appreciated 5.9 per cent against the US dollar in the year to date.
In the previous rate cut cycle of 225 basis points from 2019 to 2020, Citi pointed to S-Reits’ outperformance of the Straits Times Index, the financial sector and property developers.
The office S-Reits subsector was the best-performing in the quarter ending September, supported by resilient occupancy rates and strong rental reversions in the first half of 2025.
“These factors have helped ease concerns over soft leasing demand amid a challenging macroeconomic backdrop influenced by Trump’s tariff measures,” said Morningstar equity analyst Xavier Lee. “Nonetheless, we expect uncertainty to persist as the US continues trade negotiations with key partners.”
Top picks
Morningstar’s top S-Reit picks were both tagged as “undervalued”. Keppel Reit , which has a 2025 dividend yield of 5.6 per cent, is expected to benefit from a “tightening Singapore office market”. Meanwhile, Frasers Logistics & Commercial Trust’s industrial portfolio quality is “underestimated” by investors.
Office S-Reits are currently trading at a 17 per cent discount to their book value, added Morningstar, which is the steepest among all subsectors.
It noted that vacancy rates are expected to narrow to 2 per cent by 2027 from 5.3 per cent currently, driving strong acceleration in rental growth, with the majority of upcoming office supply located outside the core Central Business District.
Citi analysts flagged CapitaLand Ascendas Reit , Frasers Centrepoint Trust , Frasers Logistics & Commercial Trust, Lendlease Global Commercial Reit , ESR Reit and CapitaLand India Trust as its top picks.
Meanwhile, it classified Far East Hospitality Trust , CDL Hospitality Trusts and Suntec Reit as top sells. UOB KayHian also pointed out that the 15 S-Reits in the new iEdge Singapore Next 50 Index accounted for a total weightage of 42.6 per cent in aggregate. These S-Reits included Keppel Reit, Lendlease Global Commercial Reit and CapitaLand India Trust.
It said trading liquidity for these S-Reits will likely improve over time, as financial institutions are expected to launch exchange-traded funds and mutual funds benchmarked to this index.
The risk of “significant” asset devaluation was “low”, said Morningstar, even though valuation capitalisation rates for some Reits were lower than the prime yields reported by commercial real estate services and investment firm CBRE. These rates represent the ratio of a property’s annual net operating income to its asset value.
“This is supported by high occupancy rates and strong rental reversions across the Reits under our coverage,” said Lee. “Any downward pressure on valuations from cap rate expansion should be offset by the robust operating performance of the underlying assets.”
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