S-REITs to withstand softening property market conditions

URA data shows that vacancy rates for retail spaces in Central Area have increased to 13.2% 

Whilst property demand will continue to ease for the remainder of 2023, S&P Global Ratings believes Singapore’s real estate investment trusts (REITs) will be able to stand firm.

In a report,  S&P Global Ratings Credit Analyst Hwee Yee Ong said S-REITs’ resilience to the softening market conditions underpins their stable rating outlooks.

Commenting on the office sector, Ong said the market will face softer demand due to ongoing macroeconomic uncertainties.

“Elevated supply in 2023 and 2024 could worsen the situation. The impact on landlords varies, depending on the quality of their portfolio,” Ong said.

“There is a growing bifurcation between prime offices and aged buildings. A flight-to-quality trend will benefit prime-office landlords, which typically offer end-of-trip facilities, flexible spaces and sustainability credentials. Most tenants, especially multinational corporations, are prioritising sustainability requirements when assessing leasing options,” Ong added.

Amongst S-REITs which were able to maintain a low vacancy rate is CapitaLand Integrated Commercial Trust (CICT). The vacancy rate of CICT’s Singapore office portfolio as of 31 March was 3.3%.

The retail market, on the other hand, will remain healthy due to tight supply and a recovery in tourism, said Ong.

“Downtown malls, in particular, will benefit from buoyant tourism inflows. For the first half of 2023, visitor arrivals totalled 6.3 million, quadruple the number for the same period last year,” Ong said. 

“We anticipate healthy leasing demand for the retail portfolio of our rated REITs. Rental reversion was positive for the retail segment, meaning, the REITs achieved higher rents on lease expiry. Rents increased between 4% and 8% for the fiscal period ending March 2023. This is based on average incoming rents as compared to average outgoing rents,” Ong added.