DBS sees rotation into S-REITs as yield gap widens

Lower SORA, rental growth and refinancing savings will likely support H2 distributions.

Real estate investment trusts could attract renewed investor interest as their dividend-yield advantage over local banks reaches a multi-year high, according to DBS Group Research.

S-REITs offered an average distribution yield of about 6.2% in August, compared with about 4% for Singapore banks.

The resulting spread of 2.2 percentage points exceeded levels recorded during the 2022–2024 interest-rate increase cycle, potentially encouraging investors to rotate back into REITs.

DBS said the current operating environment also differed from earlier rate-hike periods because three-month compounded SORA had fallen to approximately 1.1%–1.2% from its 3.7% peak.

The lower benchmark rate could reduce refinancing expenses as REITs replace debt previously secured near peak rates. DBS estimated that the savings could reach two percentage points in some cases.

The research house said 41% of the S-REITs it covers delivered better-than-expected results in H1, supported by positive rental reversions, high occupancy and lower borrowing costs.

Rental reversions generally ranged from 8% to 10% across office, retail and industrial properties.

DBS expects distribution per unit growth to accelerate to approximately 3% in H2 from the first half. Small- and mid-cap REITs are projected to record growth of 4%, compared with 1% for their large-cap counterparts.

For FY2026, DBS forecasts average DPU growth of approximately 3% year on year. Combined with the sector’s distribution yield, it estimates that S-REITs could deliver a total return of about 8.3%.

The research house ranked office as its preferred property segment, followed by industrial, retail and hospitality.

It said Singapore’s office market remained supported by limited new supply and demand for higher-quality buildings. Core CBD Grade A vacancy stood at a record-low 3.3% in Q2, whilst rents rose for a sixth consecutive quarter.

DBS’s preferred S-REITs include CapitaLand Integrated Commercial Trust, CapitaLand Ascendas REIT, Mapletree Logistics Trust, Suntec REIT, Parkway Life REIT, Centurion Accommodation REIT, Lendlease Global Commercial REIT and NTT DC REIT.

However, uncertainty over long-term interest rates remains a risk to valuations. Some REITs also face weaker contributions from overseas properties and foreign-exchange pressures arising from the stronger Singapore dollar.

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