DBS sees earnings shift for S-REITs despite high interest rates

It expects a DPU CAGR of over 2.1% from FY25 to FY26, signalling a recovery in investor payouts.

Despite a "higher for longer" rate environment, DBS sees a shift in the earnings trend for Singapore REITs (S-REITs), with some already benefiting from lower financing costs.

The brokerage firm expects a distribution per unit (DPU) compound annual growth rate (CAGR) of over 2.1% from FY25 to FY26, signalling a recovery in investor payouts.

Recent results show operational resilience and growth momentum is expected to build this quarter. With capital management metrics stabilising, DBS analysts Dale Lai and Derek Tan believe the worst may be over for the sector.

A potential 25-basis-point (bp) interest rate cut—currently not factored into estimates—could further drive earnings upside of 1.2% annually.

Recent bond issuances by Frasers Centrepoint Trust (FCT) and Mapletree Pan Asia Commercial Trust (MPACT) at 3.1-3.3% suggest that further declines in portfolio interest rates may be in sight.

Additionally, Singapore’s 3-month SORA has peaked and is stabilising at 2.4-2.5%, offering refinancing benefits to S-REITs. Historically, S-REITs have performed well during rate pauses and cuts, as seen in 2016 and in late 2023 through early 2024.

DBS maintains a preference for Retail and Industrial REITs, citing resilient earnings and strong growth prospects in FY25. The bank continues to favor Retail over Industrial, followed by Office and Hospitality, with China-focused Retail REITs and Hospitality REITs likely to be early beneficiaries of lower rates.

Amongst its top picks, DBS highlights CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust in the Retail segment, whilst Mapletree Industrial Trust and Mapletree Logistics Trust are preferred in the Industrial space.

S-REITs are currently trading at 0.8x price-to-book (P/B) and offer a projected FY25 yield of 6.2%, translating to a 3.5% spread against the 10-year bond yield—slightly above historical levels.

DBS sees value in Hospitality and Industrial REITs, which are trading at yield spreads 50-100bps higher than their historical averages. The report suggests that this presents a tactical re-entry opportunity into the sector, particularly as interest rates approach their peak.

Whilst office assets continue to face challenges, with higher vacancies and slower rental growth, China’s real estate market is showing early signs of stabilization despite ongoing concerns over oversupply.

Overall, DBS remains constructive on S-REITs, emphasising that stabilising interest rates and refinancing savings will be key drivers of the next phase of earnings growth.