S-Reits ‘positioned for recovery’ as yield spreads widen: analysts
The sector offers a yield spread of about 3.8%-4% over 10-year Singapore government bonds, say DBS and UOBKH
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[SINGAPORE] Singapore real estate investment trusts (S-Reits) could be undervalued defensive plays thanks to peaking interest costs and widening yield spreads that indicate a sectoral turnaround.
Despite the overhang of higher-for-longer global benchmark rates, research notes from UOB Kay Hian (UOBKH) and DBS highlighted that a substantial portion of macroeconomic risk was already priced into the market.
The sector thus offers a compelling yield spread of about 3.8 to 4 per cent over 10-year Singapore government bonds, with valuations hovering around a 0.9 times price-to-book ratio.
In a Thursday (Jun 4) note, DBS analysts described the space as “priced for pain”, but “positioned for recovery”. S-Reits are in a strong position to ride out macroeconomic volatility, thanks to quality earnings and resilience, they said.
The narrative around borrowing costs has shifted from a headwind to a potential tailwind for the trusts, they said. Although 10-year yields in the Group of Seven economies climbed to multi-year highs, Singapore rates remained relatively anchored.
Consequently, the DBS analysts noted the sector’s correction was likely to be “materially milder than in previous cycles”.
Blue chips and data centres
Close to 85 per cent of S-Reit managers anticipate stable or lower interest rates into 2026, following a meaningful decline in benchmark rates during the first quarter.
This favourable refinancing environment was gradually expected to support a recovery in distributable income, while the sector’s all-in debt cost remains on a downward trajectory at a manageable 3.3 per cent.
Both brokerages also showed a clear preference for specific asset classes, preferring structurally stronger portfolios from the broader pack.
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DBS favoured office over industrial, retail, and hotel assets. The bank preferred landlords with pricing power, resilient occupancies, and exposure to submarkets where supply is constrained like Grade A office spaces, logistics, and data centers.
In its Jun 2 note, UOBKH’s segmental ratings largely mirrored this sentiment, maintaining an overweight stance on healthcare, industrial, office and retail properties, while assigning a market weight rating to the hospitality space.
In an environment described as increasingly “fundamentals-driven” and a “stock-picker’s market” by DBS, both research houses shared a preference for blue-chip resilience and data centre exposure.
CapitaLand Integrated Commercial Trust (CICT) and NTT DC Reit emerged as mutual favourites across both brokerages.
DBS maintained its preference for CICT, CapitaLand Ascendas Reit (Clar) , and Mapletree Logistics Trust (MLT) as large-cap picks, while highlighting Lendlease Global Commercial Reit , Parkway Life Reit , NTT DC Reit, and Centurion Accommodation Reit for mid-cap alpha.
Concurrently, UOBKH recommended bargain hunting with buy ratings for CICT, Frasers Logistics & Commercial Trust , Mapletree Pan Asia Commercial Trust , NTT DC Reit and UI Boustead Reit .
Operational catalysts also emerged from active capital recycling and leasing momentum.
In the office sector, UOBKH noted that Allianz also signed an attractive long-term deal to lease 78,000 square feet at the newly redeveloped Shaw Tower, relocating from its prior space at CapitaSky.
Meanwhile, UI Boustead Reit’s May 23 agreement to develop a build-to-suit aerospace facility at Seletar Aerospace Park demonstrated a continued ability to execute yield-accretive external growth. The project was forecasted to provide an 8.6 per cent yield on cost, which UOB Kay Hian noted was well above the Reit’s projected portfolio yield.
In the office sector, healthy flight-to-quality demand was evidenced by Allianz signing a long-term deal for 78,000 square feet at the newly redeveloped Shaw Tower.
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