S-REITs enter recovery phase after 11.8% slide in 2024 returns: UOB

Historical data shows a negative correlation of -0.59 between the FTSE ST All-Share REITs Index and the S&P 500 Index.

Singapore-listed REITs (S-REITs) may be entering a recovery phase after several years of weak performance.

According to UOB Kay Hian, the sector is showing signs of resilience supported by structural strengths such as long lease tenures, low gearing, and attractive distribution yields. The brokerage maintains its OVERWEIGHT rating on the sector, noting that S-REITs could perform well even if global markets turn volatile.

Historical data show a negative correlation of -0.59 between the FTSE ST All-Share REITs Index and the S&P 500 Index, suggesting potential for outperformance in a downturn.

The introduction of new US tariffs has added complexity to the investment landscape. A baseline reciprocal tariff of 10% on imports from all countries will take effect from 5 April 2025, with higher rates of 20% on the EU and 24% on Japan.

China faces the highest impact, with a cumulative tariff rate of 54% due to previous measures. This development has implications for REITs with significant China exposure.

For instance, CapitaLand China Trust (CLCT), Sasseur REIT, and Mapletree Logistics Trust (MLT) could be negatively affected. In contrast, sectors with more domestic and stable profiles—such as suburban retail, healthcare, and data centres—are seen as more sheltered.

UOB Kay Hian highlighted several S-REITs that it considers relatively insulated from the trade tensions. These include CapitaLand Integrated Commercial Trust (CICT) and Lendlease REIT (LREIT) in the suburban retail space; Digital Core REIT (DCREIT), Keppel DC REIT, and Mapletree Industrial Trust in data centres; and Parkway Life REIT (PREIT) in healthcare.

These REITs tend to have lower gearing and longer lease expiries, which contribute to more stable cash flows. For example, PREIT has a WALE of 15.3 years and gearing of 34.8%.

Interest rates are another important factor in the REITs’ outlook. Whilst macro uncertainty remains high due to geopolitical tensions and trade policies, UOB Kay Hian noted the cost of debt appears to have peaked. The Federal Reserve’s median projection suggests two rate cuts by the end of 2025.

Meanwhile, the three-month compounded SORA has eased to 2.56% in the first quarter. REITs with shorter average debt maturities, such as FLT and LREIT, may benefit from these lower refinancing rates.

From a valuation standpoint, many blue-chip S-REITs are trading at 6–7% distribution yields, following cumulative corrections of 7.7% in 2020, 15% in 2022, and 11.8% in 2024.

Over the 2020 to 2024 period, the FTSE ST All-Share REITs Index posted a negative return of 6%, significantly underperforming the Straits Times Index’s 59% gain. This underperformance may offer a base for potential mean reversion, especially as fundamentals remain intact.

Select REITs are also progressing on asset enhancement and expansion initiatives. CICT is upgrading the IMM Building into Singapore’s largest outlet mall and enhancing its Frankfurt asset ahead of occupancy by the European Central Bank.

PREIT is advancing with the Mount Elizabeth Hospital redevelopment and evaluating further acquisitions. DCREIT, meanwhile, has completed a strategic acquisition in Osaka that is expected to be accretive to its 2024 distribution per unit.

Overall, whilst external headwinds remain, the report suggests that the combination of defensive balance sheets, stabilising interest costs, and compelling yields could support a rebound in the S-REITs sector.