S-REITs recover as easing inflation fears brighten rate outlook

Healthcare and retail outperformed in June.

Singapore real estate investment trusts (S-REITs) are expected to recover as easing inflation pressures reduce the likelihood of aggressive US interest rate hikes, analysts said on Monday.

Research houses UOB Kay Hian and DBS Group Research both maintained positive outlooks on the sector, pointing to attractive valuations and resilient fundamentals even as global markets remain unsettled by a more hawkish US Federal Reserve.

The Fed left its benchmark rate unchanged at 3.5% to 3.75% at its June meeting but removed its previous easing bias and offered less forward guidance, reinforcing expectations that rates could stay higher for longer. Despite the hawkish signal, analysts from both houses said much of the risk has already been reflected in S-REIT prices.

The FTSE ST REIT Index fell 6.9% in March before rebounding only marginally by 1.9% in the second quarter of 2026, according to UOB Kay Hian. Since the start of the year, the sector has declined 6.1% while the Straits Times Index rose 11%, DBS said. S-REITs managed a 0.4% gain in June, underperforming the STI's 2.6% monthly rise.

DBS said S-REIT valuations are currently at around 0.9 times price-to-book with a forward yield of 6.2%, representing a spread of 4.2 percentage points. It described this as close to one standard deviation below the sector's long-term average.

UOB Kay Hian maintained an Overweight rating on the sector across all subsegments, with analyst Jonathan Koh citing the collapse in energy prices as a key factor moderating inflation expectations. WTI crude oil prices have fallen 39% to $88.85 (US$68.78) per barrel following the reopening of the Strait of Hormuz after the US and Iran signed a memorandum of understanding on June 17. Jet fuel prices have dropped 51% to $147.01 (US$113.80) per barrel over the same period.

New Fed chair Kevin Warsh said at the European Central Bank's annual forum in Sintra, Portugal on July 1 that "inflation risks have come down," whilst reiterating the Fed's commitment to price stability. US core PCE inflation stood at 3.4% year-on-year in May 2026, UOB Kay Hian noted.

DBS said the Singapore 10-year government bond yield has remained anchored at around 2.04%. The 3-month compounded SORA stood at 1.08% in June, which DBS described as substantially below the S-REIT sector's average borrowing cost of above 3%. This preserves scope for further debt repricing benefits as legacy borrowings mature and are refinanced, the house said.

The upcoming first-half 2026 results season is seen as a key near-term driver for the sector. DBS said investors are expected to closely examine distribution per unit trajectories as earnings are reported, with operating metrics described as stable. It added that healthcare and retail subsectors outperformed on a relative basis in June, gaining 1.0% and 0.8% respectively.

Both houses flagged an economic downturn caused by uncertainties from a prolonged Middle East conflict and elevated energy prices as the key risk to the sector outlook.