S-Reits earnings, DPU likely to decline in Q3 despite interest rate cut

HIGHER interest costs are expected to continue weighing down the earnings and distribution per unit (DPU) of Singapore-listed real estate investment trusts (S-Reits) in the last quarter, despite the US Federal Reserve cutting interest rates for the first time in more than four years last month.

Analysts say that the sector’s DPUs are likely to “stay flat” or even contract, given that most S-Reits have their debts pegged to fixed interest rates. It will also take time for lower interest rates to have a positive effect on their earnings.

They expect S-Reits earnings to pick up in the second half of FY2025 instead.

Their comments come ahead of the upcoming results season for S-Reits, which kicks off on Wednesday (Oct 16).

Most S-Reits will report their financial results for the third quarter of FY2024, while Reits sponsored by Mapletree Investments and Frasers Property will be issuing their first half and full-year results, respectively.

Higher interest costs, fixed interest rates weigh on earnings

RHB analyst Vijay Natarajan said that the majority of S-Reits reporting full or half-year performances will likely post year-on-year (yoy) declines in their DPU, even as they turn around a higher yoy revenue and net property income.

“This is due to higher interest costs and forex, which is expected to continue weighing on their bottom line,” said Natarajan.

Morningstar equity analyst Xavier Lee was more optimistic. He said DPUs for the third quarter will stay “relatively flat” as it will take time for interest rate cuts to reflect in S-Reits’ earnings. This is especially so as most S-Reits under Morningstar’s coverage have debt with fixed interest rates.

While S-Reits’ DPUs are expected to decline 2.7 per cent this year compared to the previous year, OCBC head of investment research Carmen Lee believes they will recover by 3.9 per cent next year.

“This will come from a softer interest rate outlook next year following the recent rate cut by the US Fed,” she said.

Sub-sector performance

Across the various Reit sub-sectors, Natarajan of RHB expects earnings in the industrial sector to show better top-line growth.

Official data suggests that there is robust manufacturing activity on the ground, and Natarajan said that he expects demand for industrial properties to remain healthy, even as supply remains moderate.

Meanwhile, S-Reits in the hospitality sector are expected to see stronger growth due to the rising average revenue per available room, said Paul Chew, head of research at Phillip Securities Research.

Natarajan, however, believes that earnings in the hospitality sector are likely to be lower this year compared to last year, as the strength of last year’s performance makes it harder to achieve similar or better results.

For office S-Reits, Natarajan said he would watch for the overall demand for offices as well as signs of weakness in Grade A Central Business District office rents.

Likewise, Lee of Morningstar said he would be watching out for changes in office leasing inquiries and office demand, in light of high profile layoffs recently. Consumer electronics giant Dyson and fintech firm MoneyHero are among some companies to have laid off staff in Singapore recently.

For retail S-Reits, Lee said that Singapore may have registered a weak performance for its third-quarter retail sales as some spending may have gone overseas. Nevertheless, he expects overall shopper traffic and spending to remain resilient for suburban malls.

Interest costs to peak in 2025

The overall interest costs of S-Reits are expected to peak by the first quarter of 2025, before gradually easing by the second quarter, said Natarajan.

As most S-Reits have a high proportion of fixed-rate debt, the positive impact from rate cuts on their earnings will likely be more significant only in the second half of FY2025.

S-Reits with a higher proportion of floating-rate debt, on the other hand, may stand to gain in their earnings earlier than other S-Reits. These include CDL Hospitality Trusts (CDLHT) , Far East Hospitality Trust and Suntec Reit , said Natarajan.

Krishna Guha, analyst at Maybank Securities, expects funding cost and coverage ratio to stabilise. He added that he will watch out for signs of further reductions in funding cost guidance. On asset value, he also expects the value of Singapore assets to stay stable, but said overseas asset values may show signs of bottoming out.

The reporting season will kick off with Parkway Life Reit reporting after market close on Wednesday, followed by Keppel DC Reit and Sabana Reit on Friday.

More counters will release their results the following week, including Mapletree Logistics Trust on Oct 22, Frasers Centrepoint Trust on Oct 25 and CDLHT on Oct 29.