<div id="readability-page-1"><div><p>[SINGAPORE] RHB downgraded its call on the Singapore real estate investment trust (S-Reit) sector to “neutral” from “overweight” on Thursday (Mar 26), citing “dimmed” rate-cut expectations due to the ongoing Iran war.</p><p>Despite Singapore remaining a safe haven with its real estate sector fundamentals intact, investors are “likely to stay on the sidelines” amid a volatile and hawkish inflationary and interest rate outlook, said RHB analyst Vijay Natarajan.</p><p>To that end, he recommends that investors stick to defensive, large-cap and Singapore-centric S-Reits to ride out the current market volatility. </p><h2>‘Resurgent inflation expections’ </h2><p>Natarajan said that global bond yields have risen in the last three weeks due to the market weighing the impact of a prolonged energy supply disruption. This has shifted expectations on inflation. </p><p>For example, swap pricing points to at least one rate hike by the European Central Bank, Bank of England and Bank of Japan; the US Federal Reserve is not expected to have rate cuts until 2027.</p><p>The “resurgence of inflation expectations” are likely to weigh on S-Reit sector performance, which just started recovering from a sharp interest rate-hike cycle from 2021 to 2024, said Natarajan. </p><p>Nevertheless, the S-Reit sector’s improving operational performance and healthy balance sheets are likely to cushion the sector from impacts from the Iran war. </p><p>Natarajan noted that the majority of S-Reits have enacted measures to manage utility and cost pressures, and have spread-out debt maturities and declining interest cost outlooks.</p><p>The near-term impact from the Middle East conflict on the S-Reits sector is likely to be indirect. For example, a spike in bond yields due to the conflict could lower yield spreads, reducing the allure of yield instruments, said Natarajan.</p><h2>Singapore’s safe-haven appeal</h2><p>The brokerage expects Singapore-centric S-Reits to outperform due to Singapore’s rising safe-haven appeal and the stable Singapore dollar amid a volatile macroeconomic outlook.</p><p>Natarajan said that Singapore-centric Reits can benefit from the Republic’s government fiscal policy support cushioning the sector during an economic downturn. </p><p>The three-month Singapore overnight rate average (Sora), the key domestic leading interest rate benchmark, is also expected to remain benign due to higher liquidity. Singapore-centric Reits also do not face foreign exchange risks, he added.</p><p>Among Singapore-centric Reits, RHB’s most to least-preferred subsectors are office, industrial, retail, hospitality and overseas.</p><p>RHB said that Singapore’s office sector continues to be a major outperformer globally, with high occupancy of around 95 per cent and continued steady rent increase. </p><p>Industrial S-Reits have also posted stronger operational metrics, in line with higher industrial demand. </p><p>Overall, interest costs across the S-Reit sector will remain on a gradual decline, underpinned by fund inflows, potentially from the Middle East to Singapore for its rising safe-haven appeal.</p><p>However, the sector may face spillovers from overseas inflationary pressures as major central banks hike up interest rates.</p><p>“We could see borrowing costs for foreign currency-denominated debt starting to creep up again, albeit partially mitigated by hedges in place,” Natarajan said. </p><p>Nevertheless, as overall sector debt remains relatively stable at around 39 per cent, S-Reits are well-positioned to weather potential near-term headwinds, he added.  </p><h2>Income and income payouts remain intact</h2><p>S-Reits’ distribution per unit (DPU) – the dividends received by unitholders per unit – is expected to grow 3 per cent over the next three years on account for declining interest costs and steady income growth from positive rent reversions in the last two years.</p><p>DPU growth is also forecasted to be underpinned by acquisitions in 2025, with S-Reits reporting “better-than-expected results”, said Natarajan.</p><p>Net property income margins will likely be maintained despite expected increases in utility costs due to S-Reits entering contract hedges to lock in lower rates. Industrial Reits have also implemented a “pass-through structure and raised service charges” to offset rising cost pressures.</p><p>While data centres do not have a pass-through utility cost structure, they make up a small portion of the sector, overall having little impact on the sector’s operational costs, added Natarajan.</p></div></div>

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<p>RHB has downgraded its outlook on Singapore real estate investment trusts (S-Reits) from ‘overweight’ to ‘neutral’ due to reduced expectations for rate cuts amid the ongoing Middle East conflict. Analyst Vijay Natarajan suggests investors focus on defensive, large-cap S-Reits, as inflation concerns and rising global bond yields may impact sector performance. Despite challenges, Singapore-centric S-Reits are expected to benefit from stable fundamentals and government support, with distribution per unit projected to grow 3% over the next three years. The sector remains well-positioned to manage near-term headwinds, maintaining income and payouts.</p>

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RHB downgrades S-Reits to ‘neutral’ as Middle East conflict dims hope for rate cuts