Industrial REITs gain traction with DBS forecasting FY25 rebound

Industrial REITs have suffered a ~5% year-to-date correction, compared to the relatively flat S-REIT index.

After months of underperformance, Singapore’s industrial REITs are shaping up to be the next comeback story in the S-REIT space, according to DBS Group Research.

In a note, analysts Dale Lai and Derek Tan suggest that “a re-entry opportunity now emerges” as headwinds from interest rates, currency pressures, and trade tensions begin to ease.

DBS notes that industrial REITs, traditionally considered bellwethers in the REIT space, have suffered a ~5% year-to-date correction, compared to the relatively flat S-REIT index.

In contrast, retail REITs have held up, “reporting record-high occupancy, largely driven by limited new supply,” especially in suburban retail segments.

But the tide is turning. The report forecasted that industrial REITs' distribution per unit (DPU) growth will bounce back to an average of +0.5% annually from FY25 to FY27, closing the gap with retail peers. This is a notable reversal from the 3.7% DPU decline experienced by industrial REITs between FY21 and FY24.

“‘Core DPU’ trends [are] turning the corner in FY25–27F,” the report states, adding that underperformance is “unlikely to last.”

Driving this recovery are three key catalysts: stabilising interest rates, improving operating metrics, and fresh acquisition activity. Interest rates have declined sharply, with both short- and long-term rates down by 140–170 basis points from a year ago. This paves the way for more accretive acquisitions.

“With borrowing costs easing, we expect the return of accretive acquisitions, particularly among large-cap industrial REITs,” the analysts write.

DBS highlights Capitaland Ascendas REIT (CLAR), Mapletree Logistics Trust (MLT), and ESR REIT (EREIT) as top picks. All three are currently trading at implied yields significantly above historical norms. CLAR and MLT offer forward implied yields of approximately 5.8%, whilst EREIT leads the pack with a striking 9.8% dividend yield.

The report positioned EREIT as a “tactical pick,” following a significant portfolio recalibration that included over $800m in new acquisitions.

Though it carries higher gearing (41.9%) and financing costs (3.7%), DBS believes “the worst appears to be over,” with signs of tapering borrowing costs and planned divestments to bring leverage down.

Despite these tailwinds, DBS tempers its optimism with a cautionary note. “Persistently high interest rates over the past few years have led to compressed accretion from acquisitions,” the report observes. Timing mismatches and FX pressures – especially from a weaker AUD – remain potential drags on earnings.

Yet, valuations may be too attractive to ignore. Most large-cap industrial REITs are trading between one and two standard deviations below historical averages on key metrics like P/NAV and yield spreads. The report calls this “an attractive opportunity not to be missed.”

DBS reiterated its BUY ratings on CLAR (target price $3.20), MLT ($1.55), and EREIT ($3.10), emphasising that investors could be rewarded for getting in early. “Valuations for both REITs remain compelling,” it says of CLAR and MLT. “They are currently trading at levels not seen since March 2020.”