Singapore Real Estate Investment Trusts (S-REITs) have long been a cornerstone of the Little Red Dot’s investment landscape, offering investors a unique blend of income and growth potential. Despite global economic uncertainties, S-REITs remain attractive to investors seeking a defensive strategy without compromising sustained long-term growth.
With anticipated interest rate cuts on the horizon and demand for high-quality, sustainable assets on the rise, investors can capitalise on these trends. Let’s dive into our latest insights to explore key strategies, sector performance, and emerging opportunities shaping the future of S-REITs.
The investment case for S-REITs
• Resilient economy and cooling inflation are key for near-term growth
As of Sept 30, S-REITs have posted a total return of +6.7% year-to-date (ytd) and +20.5% over the trailing-one-year (T1Y), with significant performance upticks in 2H2024. This surge, particularly in 3Q2024, marked the best quarterly performance since 2020, driven by optimism surrounding anticipated interest rate cuts.
According to the Singapore Exchange S68 (SGX), retail investors have remained net buyers of S-REITs throughout the year, with approximately $850 million in net inflows. By sector, S-REITs have seen the highest net retail inflows this year, further signalling investor confidence and value-seeking behaviour.
See also: US equities, IG, fixed income strategies, gold and copper among top investment picks: UBS
Despite global inflation and high interest rates, Singapore’s economy has demonstrated robust resilience, with 2Q2024 GDP growth of 2.9% y-o-y. A sustained decline in core inflation has further improved market conditions. This favourable combination is expected to drive rental growth, stabilise operating costs and boost earnings for S-REITs.
As interest rates begin to fall, borrowing costs will reduce, easing pressure on dividend distributions and enhancing the appeal of S-REITs for income-seeking investors.
• Monetary easing set to provide tailwinds
See also: With Trump win boosting stocks, investors hunt for next winners
REITs are inherently sensitive to interest rate fluctuations and central bank policies. The prolonged period of elevated rates has reduced distributions and capped growth. However, the upcoming rate cuts offer some relief. Historically, S-REITs have outperformed during periods of monetary easing as lower rates reduce borrowing costs, improve profitability and enhance yield attractiveness compared to other income-generating assets.
After two years of decline driven by concerns over sustained high interest rates, a rate pivot presents an attractive opportunity for investors to accumulate undervalued S-REITs. As the improvement in financing costs and distributions may take time to materialise, the full rebound in unit prices has yet to be fully reflected, further increasing their investment appeal in the current environment.
• Dividend yield and valuation remain attractive
S-REITs still appear to be undervalued, with an aggregate price-to-book (P/B) ratio of 0.97 times, placing them near the negative one standard deviation of the trailing long-term average. The implied cap rate of 4.2% is also higher by around 30 basis points (bps) compared to the trailing long-term average. This presents an opportunity for investors to capture both capital appreciation and attractive income potential as S-REITs continue to offer relatively high dividend yields of 5% to 6%, underpinned by the quality and resilience of their assets; with a yield spread of 3%, among the highest globally, they are especially appealing in a declining interest rate environment. Their strong asset base and consistent demand make them a compelling choice for income-focused investors.
• Defensive attributes for an uncertain economy
Nearly half of S-REITs (45.1% by market cap) are concentrated in the industrial, data centre and healthcare sectors, which are operationally resilient and aligned with long-term structural trends. These sectors have performed well this year, with data centres (+33% ytd) and industrial REITs (+12% ytd) excelling due to resilient e-commerce demand and increased demand from AI and cloud computing. Healthcare REITs also outperformed (+22% ytd), benefiting from a recovery in medical tourism, declining interest rates and their non-cyclical nature, making them attractive investments, similar to long-term bonds.
These sectors benefit from stable cash flows supported by long-term leases, averaging 15 years for healthcare, seven years for data centres and four years for industrial REITs. Many of these leases are triple net, which mitigates operational risks by protecting REITs from rising property expenses, ensuring steady cash flow generation even in volatile markets.
For more stories about where money flows, click here for Capital Section
In contrast, the hospitality (+5% ytd) and office (+9% ytd) segments have faced challenges. Despite an increase in high-profile events and concerts in Singapore, hospitality has struggled with high travel costs and the delayed return of Chinese tourists.
Office REITs have been affected by weakness in the US office market, negatively impacting overall performance.
However, S-REITs with Singapore-focused assets maintain stronger operational footing than their global peers, thanks to the country’s land constraints. This has contributed to retail S-REITs (+11% ytd), maintaining stable demand and performance, even in the face of slowing consumer demand.
• Beachhead for global and new economy real estate
S-REITs are increasingly expanding beyond Singapore, acquiring assets in Australia, Europe and the US. Over 90% of S-REITs and property trusts now hold international assets, offering investors exposure to global properties. Recent listings like Daiwa House Logistics Trust DHLU and Digital Core REIT reflect this trend. While this geographical diversification enhances growth prospects and broadens revenue streams, it also introduces foreign currency and market volatility risks. However, this positions S-REITs to capitalise on global real estate trends while mitigating the impacts of localised economic downturns.
Key sectors like data centres, logistics and high-tech industrial spaces are critical to supporting digital transformation, automation, and e-commerce. Logistics, driven by the demand for efficient distribution channels, has become the dominant industrial subsegment, overtaking traditional warehouses and flex spaces. Data centres, essential for 5G networks and artificial intelligence (AI) computing, enable investors to benefit from AI growth without betting on specific technology providers. Additionally, increasing demand driven by data privacy concerns and digital sovereignty initiatives further enhances the appeal of a localised data centre.
The rise of smart automation systems, like IoT sensors and robotics, is also boosting demand for hi-tech spaces, with Singapore emerging as a global leader in automation. S-REITs are capitalising on this digital shift by investing in smart buildings and property tech to improve operational efficiency and tenant experiences and strengthen ESG metrics. These innovations reduce costs and enhance asset appeal to tenants and investors, positioning S-REITs at the forefront of real estate’s digital transformation.
• ESG as a core focus for new-age investors
Since the Monetary Authority of Singapore (MAS) and the SGX introduced guidelines on environmental risk management and mandatory climate reporting in January 2022, S-REITs have made significant strides in climate-related disclosures. A study by EY-REITAS published in September 2023 highlights that S-REITs outperform their global counterparts in this area, demonstrating a strong commitment to transparency and sustainability.
Sustainability is becoming increasingly important in the REITs sector, with environmental, sustainability and governance (ESG) considerations significantly shaping the future of S-REITs. These trusts invest in green-certified properties, enhance energy efficiency and focus on sustainable urban development. Such initiatives reduce environmental impact and attract ESG-conscious investors, which can lead to premiums on rentals and valuations and long-term asset appreciation.
• Strategy and outlook as an S-REIT investor
Taking advantage of mispriced S-REITs, particularly in the office and hospitality subsectors, can be appealing in the short term. However, adopting a diversified investment strategy across various segments is crucial for mitigating cyclicality and sector-specific risks. A balanced portfolio focusing on growth-oriented S-REITs aligned with long-term structural trends like cloud computing, AI, and an ageing population will be vital for fostering sustainable growth.
Moreover, investing in high-quality, sustainable dividend REITs is paramount, especially given uncertainties surrounding anticipated interest rate cuts and economic growth. Selecting REITs with robust fundamentals — such as resilient rental growth, high occupancy rate, effective capital management and strong balance sheet, is particularly important, considering dividend-paying capability and the sector’s reliance on debt for growth.
In the next 1–2 years, elevated borrowing costs and cap rates will pose challenges as loan maturities approach. The forward curve indicates real rates 200–300 basis points (bps) above 2021 levels, suggesting that refinancing costs and cap rates will remain high, thereby creating risks for valuations. As lenders may become increasingly cautious in this environment, it becomes vital for investors to focus on high-quality S-REITs that can effectively weather these short-term challenges.
S-REIT performance is set to benefit from favourable global economic conditions, Singapore’s strong real estate market outlook, and positive investor sentiment. Anticipated interest rate cuts should lower financing costs and enhance yield attractiveness, making S-REITs appealing due to their high-quality assets and resilient demand relative to global peers.
New REIT listings and potential mergers could also reshape the landscape, introducing fresh capital and strategic synergies that enhance market liquidity and drive growth. Emerging trends such as sustainability initiatives, shifting consumer preferences post-pandemic, and increased merger and acquisition activities will significantly influence the future of S-REITs. Sustainability efforts will attract ESG-focused investments while evolving consumer behaviours will affect property utilisation and demand. Additionally, strategic mergers and acquisitions will help S-REITs achieve economies of scale and diversify their asset bases, promoting long-term resilience and growth.
Strategy and approach of Phillip Capital Management
Phillip Capital Management has over 13 years of experience managing products that invest in S-REITs with regular dividend payout.
Phillip Capital Management was incorporated in 1999 as a fund management company with a regional network, including Singapore, Malaysia, India, Turkey, Thailand, Australia, Hong Kong, Indonesia and London. Our products and asset classes include unit trusts and exchange-traded funds that invest in equities, bonds, and the money market. Our investment teams are local participants in the capital markets, providing insight into hyper-local investment situations. Simultaneously, we collaborate across the region to share ideas and learn from each other. A member of PhillipCapital, we have an established track record managing funds investing in the Asia Pacific region and globally, having won fund awards from Standard & Poor’s, Lipper and SGX. For more information, visit https://phillipfunds.com/
Joel Mauriths Kambey is an investment analyst at Phillip Capital Management with over four years of equity research and fund management experience. He holds dual degrees in Engineering and Business Management from the Singapore University of Technology and Design (SUTD) and Singapore Management University (SMU)
