"DBS Sees Earnings Shift for S-REITs Despite High Interest Rates"

In the ever-evolving landscape of real estate investment trusts (REITs), Singapore REITs (S-REITs) have been navigating a challenging environment marked by higher interest rates. However, recent insights from DBS suggest a shift in the earnings trend, offering a glimmer of hope for income-seeking investors. Let's dive into the factors driving this change and what it means for your investment strategy.

The Current Landscape

The past year has seen a pattern where publicly traded REIT total returns have moved inversely to the 10-year Treasury yield. When yields rise, REITs tend to fall, and vice versa. This inverse relationship has been particularly evident in 2025, with 10-year Treasury yields off recent peaks and REIT total returns up about 5% year-to-date. This trend highlights the sensitivity of REITs to interest rate movements, making it crucial for investors to stay informed about the broader economic environment.

DBS' Bullish Outlook

DBS analysts Dale Lai and Derek Tan have noted a shift in the earnings trend for S-REITs, despite the "higher for longer" rate environment. Recent results show operational resilience and growth momentum building this quarter, with capital management metrics stabilizing. This stability is a positive sign for the sector, indicating that the worst may be over.

One of the key drivers of this optimism is the potential for a 25-basis-point (bp) interest rate cut, which is currently not factored into estimates. Such a cut could further drive earnings upside of 1.2% annually. This potential cut, combined with recent bond issuances by Frasers Centrepoint Trust (FCT) and Mapletree Pan Asia Commercial Trust (MPACT) at 3.1-3.3%, suggests that further declines in portfolio interest rates may be in sight. This decline in interest rates would reduce the financing costs for S-REITs, thereby increasing their earnings and distribution per unit (DPU).

Sector-Specific Opportunities

DBS maintains a preference for Retail and Industrial REITs, citing resilient earnings and strong growth prospects in FY25. The bank continues to favor Retail over Industrial, followed by Office and Hospitality. This preference is based on the expectation that these segments will benefit from lower rates and stable economic conditions.

Amongst its top picks, DBS highlights CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust in the Retail segment, whilst Mapletree Industrial Trust and Mapletree Logistics Trust are preferred in the Industrial space. These REITs are trading at 0.8x price-to-book (P/B) and offer a projected FY25 yield of 6.2%, translating to a 3.5% spread against the 10-year bond yield—slightly above historical levels.

Tactical Re-entry Opportunity

DBS sees value in Hospitality and Industrial REITs, which are trading at yield spreads 50-100bps higher than their historical averages. This presents a tactical re-entry opportunity into the sector, particularly as interest rates approach their peak. The report suggests that this presents a tactical re-entry opportunity into the sector, particularly as interest rates approach their peak.

Risk Mitigation

While the outlook for S-REITs is positive, it's essential to remain cautious. Office assets continue to face challenges, with higher vacancies and slower rental growth. Additionally, China’s real estate market is showing early signs of stabilization despite ongoing concerns over oversupply. These factors could impact the performance of certain REITs, so it's crucial to diversify your portfolio and stay informed about sector-specific risks.

Conclusion

In conclusion, DBS' bullish outlook on S-REITs offers a compelling opportunity for income-seeking investors. The potential for a 25-basis-point interest rate cut, combined with stabilizing capital management metrics and strong growth prospects in key segments, makes S-REITs an attractive option for your portfolio. However, it's essential to remain cautious and diversify your investments to mitigate sector-specific risks. As always, stay informed and make data-driven decisions to maximize your returns in this ever-changing market.