Middle East situation disrupts interest rate expectations, analysts have divergent views on S-REIT | Lianhe Zaobao

The situation in the Middle East has raised inflation expectations and lowered interest rate cut expectations, leading several institutions to adopt a cautious outlook on Singapore Real Estate Investment Trusts (S-REITs) recently. However, some analysts believe that current valuations reflect the digestion of some downside risks, indicating that this sector has resilience. Analyst Vijay Natarajan from RHB Singapore released a report at the end of last month, downgrading the rating of S-REITs from "Overweight" to "Neutral," stating that the ongoing Middle East conflict will negatively impact the performance of this sector. He pointed out that the global economic outlook is uncertain. Although the Singapore market has safe-haven attributes and the industry fundamentals are robust, investors are likely to adopt a wait-and-see approach amid fluctuations in inflation and interest rate prospects, as well as changing hawkish sentiments. The analysis team led by Wang Qianqiao, head of equity research for HSBC in the ASEAN region, also noted that macroeconomic uncertainty has led to a decrease in corporate risk appetite in the short term, resulting in a slowdown in capital market activities. Valuations Near Historical Lows, Risks Have Been Digested On the other hand, an analysis released by DBS Group Research on Tuesday (March 31) took an optimistic stance. Analysts pointed out that despite the renewed risk of stagflation due to the Middle East conflict, S-REITs have fallen about 8% year-to-date, but the price-to-book ratio is at 0.9 times, still undervalued. This level is close to the historical low of about 0.8 to 0.85 times, reflecting that the market has priced in a significant amount of macro risks. In this context, the expected yield for the fiscal year 2026 is about 6.3%, with a spread of 4.1 percentage points relative to the 10-year bond yield, which is also attractive. The analysis also stated that the fundamentals of S-REITs in the current situation are better than during the interest rate hike cycle from 2022 to 2024. On one hand, while utility costs have risen, most have been hedged or passed on to tenants, and the worst-case net impact on the distribution per unit (DPU) is expected to be controlled at about 1% to 2.7%. On the other hand, S-REITs currently have a refinancing spread buffer of about 200 basis points, which helps maintain relatively stable refinancing costs. Analysts expect that from the fiscal year 2026 to 2027, the distribution per unit can still achieve about 3% growth. Further Reading Geopolitical tensions rise, investment should balance offense and defense SREIT's current earnings report is stable, but stock price returns have been under pressure this year so far Phillip Securities Research Investment Analysis Manager Chen Runxiong also maintains an "Overweight" rating on S-REITs. He believes that despite the increased uncertainty in the interest rate path, the Singapore Overnight Rate Average (SORA) continues to decline, with the three-month SORA currently around 1.1%, more than 150 basis points lower than the same period last year. This is expected to support lower interest expenses and stronger per-unit distribution growth for S-REITs, which are primarily denominated in Singapore dollars. Vijay also reminds that rising expectations for interest rate hikes from multiple central banks may increase borrowing costs denominated in foreign currencies. Positive Outlook on Local Asset-Focused Trusts Analysts generally have a positive outlook on S-REITs that focus on Singapore as their primary market to reduce risks from foreign exchange and overseas interest rate fluctuations. In terms of sector segmentation, Wang Qianqiao's team believes that rising macro uncertainty will put pressure on office leasing demand, while retail, which is based on local consumption, is more defensive. The team is optimistic about local asset-focused trusts, especially those primarily holding retail assets, such as CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust; however, they downgraded Keppel REIT from "Buy" to "Hold," citing expectations that an unstable macro environment will suppress office tenant demand, with the transition period for tenants potentially being longer than expected. However, Vijay is more optimistic about prioritizing allocations in office and industrial S-REITs. This is because the retail sector may be affected by a slowing macro economy, leading to slower labor market growth, weak household spending, and reduced tourism demand, which could drag down retail demand. In contrast, the occupancy rate of Singapore's office market is as high as about 95%, with rents steadily rising, and the overall vacancy rate is expected to remain at a low of 0.5% this year, with Grade A office rents potentially increasing by 1% to 4% He also mentioned that in terms of industry, Singapore's Manufacturing Purchasing Managers' Index (PMI) has been in the expansion zone for seven consecutive months. Unless there is a drastic adjustment in tariff policies, the industrial growth outlook remains positive. Chen Runxiong believes that overseas S-REITs with yields exceeding 8% and a robust portfolio are also worth paying attention to, including Stoneweg European Combined Trust, Elite UK REIT, and United Hampshire US Reit