UOB Kay Hian maintains positive view on S-REITs amidst stability

With the 10-year Singapore government bond yield at 2.4% and the 3-month compounded SORA at 2.3%.

Singapore’s real estate investment trusts (S-REITs) continue to be a bright spot for investors seeking stability amidst global uncertainties, according to UOB Kay Hian’s latest sector update.

The brokerage maintains its OVERWEIGHT rating across all S-REIT sectors, citing Singapore’s strong fiscal discipline, minimal reciprocal tariffs, and stable bond yields as key reasons for its appeal.

With the 10-year Singapore government bond yield at 2.4% and the 3-month compounded SORA at 2.3%, REITs in Singapore offer a strong yield spread that remains attractive in the current environment.

Despite the stable macro backdrop, the FTSE ST Real Estate Investment Trust Index (FSTREI) declined 2.1% in May, underperforming the Straits Times Index’s 2.2% gain.

UOB Kay Hian attributed part of this correction to broader global market movements, even as US core PCE inflation eased to 2.6% YoY, offering some relief on the inflation front.

The leasing market saw encouraging developments, with CBRE expanding its Singapore presence by taking over an entire floor at Marina Bay Financial Centre Tower 1, increasing its office footprint by 75%.

Meanwhile, Singlife consolidated its offices into Marina One East Tower, taking over space previously vacated by Prudential. These moves suggest steady demand for premium office space in Singapore’s central business district.

Merger and acquisition activity also picked up with Frasers Property launching a renewed offer to privatize Frasers Hospitality Trust at $0.71 per unit, a 36.3% premium over its 12-month volume-weighted average price. This comes after a failed privatisation attempt in 2022 that fell short of the required shareholder approval threshold.

Performance amongst individual S-REITs was mixed. IREIT Global led gainers with a sharp 34.8% increase, followed by Elite UK REIT at 8.8%.

Data centre REITs DigiCore REIT and Keppel DC REIT also posted gains of 5.3% and 4.3% respectively.

Meanwhile, Frasers L&C Trust dropped 11.2% due to margin pressures stemming from higher non-recoverable land taxes in Australia, and Lendlease REIT slipped 6.9% following an increase in aggregate leverage to 43% after refinancing perpetual securities.

Amongst its top picks, UOB Kay Hian highlights CapitaLand Integrated Commercial Trust with a target price of $2.37, Frasers Centrepoint Trust at $2.73, DigiCore REIT at US$0.90, Parkway Life REIT at $4.85, and CapitaLand Ascott Trust at $1.38.

However, the report also warned of growing leverage concerns in select REITs, especially as some names approach or exceed the 40% leverage threshold, limiting financial flexibility if funding costs rise further.