What will boost S-REIT recovery in 2025

Analysts advise a gradual increase in S-REIT allocations given anticipated volatility.

Changes in the US monetary policy and the projected expansion of Singapore’s economy are the key factors seen to drive the recovery of the city-state’s real estate investment trusts (REIT), RHB economists said.

In a sector update, the experts said they expect three cuts in the US Federal Funds Rate this year, higher than market expectations of one to two. This will help ease long-term risk-free rates over the course 2025.

The economists also project Singapore’s gross domestic product to reach 3% this year, which is the top end of the official range.

“This Goldilocks scenario is positive for S-REITs and will drive [distribution per unit] turnaround in [fiscal year 2025], augmented by an anticipated shift in fund flows towards REITs from other high yield instruments, i.e. T-bills and fixed deposits,” RHB said.

In terms of valuation, S-REITs are attractive as they trade at 0.85x price-to-book ratio, at -1 standard deviation levels of long-term average yield and offer average yield of 6.2%.

RHB expects S-REITs to actively reallocate capital by divesting non-core assets and reinvesting in higher-yielding, better-quality properties to enhance value.

Last year saw a record $3.3b in S-REIT divestments, whilst acquisitions doubled from 2023. Many large-cap S-REITs focused on high-quality Singaporean assets.

“With many S-REITs trading at deep discounts and asset values stabilising, this could also prompt return mergers and acquisitions (M&A), privatisation, and takeover activities among S-REITs,” RHB said, noting that some possible M&A and takeover candidates are Paragon REIT, Suntec REIT and Frasers Hospitality Trust.

The experts recommend gradually increasing allocations to S-REITs amidst expected volatility and pullbacks over the course of the year from policy uncertainties. Currently, the S-REIT index is trading at about 7% above 2020’s COVID-19 lows and 33% below recent peaks, which shows that downside risks are reflected.

Industrial S-REITs offer the strongest defensive characteristics, with favorable demand, stable supply, and robust cash flow, whilst office S-REITs remain the most attractive in terms of valuation amidst undue investor concerns over the sector.

“We remain selective on retail REITs amidst softening signs in retail sales and valuation grounds, and are neutral on the hospitality sector as it is past its peak,” RHB said.

“Overseas S-REITs are trading at deep discounts and could fit investors with a slightly higher risk appetite and aiming for higher capital appreciation,” it added.