S-REITs: A Glimmer of Hope After 2024's 11.8% Slide

The year 2024 was a challenging one for Singapore Real Estate Investment Trusts (S-REITs), with the sector experiencing an 11.8% decline in returns. This downturn was driven by a combination of factors, including lingering concerns over rising interest rates, economic uncertainty, and sector-specific challenges. However, as we move into 2025, there are signs that S-REITs may be entering a recovery phase, offering investors a glimmer of hope amidst the volatility.

The 11.8% slide in S-REITs returns in 2024 was influenced by several specific factors. One of the primary contributors was the lingering effects of rising interest rates, which continued to weigh heavily on REIT valuations. This was despite the Federal Reserve's efforts to stimulate the economy through a series of rate cuts totaling 100 basis points throughout the year, beginning in September 2024. The impact of these rate cuts on S-REITs was muted, as the positive effects were offset by other economic uncertainties.

Economic uncertainty, including concerns surrounding inflation and potential recessionary pressures, also played a significant role. This uncertainty translated into subdued investor sentiment and cautious investment decisions, further dampening the performance of S-REITs. Additionally, sector-specific challenges exacerbated the decline. For instance, the office sector faced potential impacts from remote work trends, which could reduce demand for office space. This sector-specific challenge highlights how different sectors within the REIT market were affected differently by the broader economic conditions.

The industrial sector, for example, experienced a decline in total returns for 2024, down 17.7%. This was attributed to a period of rising supply that the market was digesting. Looking forward, however, there is optimism for a more favorable supply/demand picture in the coming years, which could support a recovery in this sector.

In contrast, sectors like data centers and healthcare showed resilience. Data centers led fourth-quarter performance with total returns of 7.5%, and healthcare was one of the best-performing property sectors for the year, with total returns of 24.2%. These sectors benefited from their defensive nature and the continued demand for their services, which helped mitigate the broader economic headwinds.

The historical negative correlation of -0.59 between the FTSE ST All-Share REITs Index and the S&P 500 Index suggests that S-REITs have the potential to outperform during market downturns. This negative correlation indicates that when the S&P 500 Index falls, S-REITs tend to rise, providing a hedge against market volatility. This dynamic is supported by the fact that S-REITs have shown resilience in the past, supported by structural strengths such as long lease tenures, low gearing, and attractive distribution yields. For instance, UOB Kay Hian maintains an OVERWEIGHT rating on the sector, noting that S-REITs could perform well even if global markets turn volatile.

To capitalize on this correlation, investors can employ several strategies. Firstly, they can focus on high-quality S-REITs with strong fundamentals, such as those with high-quality assets, stable tenant profiles, and experienced management teams. For example, CapitaLand Integrated Commercial Trust (CICT) and Lendlease REIT (LREIT) in the suburban retail space, Digital Core REIT (DCREIT), Keppel DC REIT (KDCREIT), and Mapletree Industrial Trust (MINT) in data centres, and Parkway Life REIT (PREIT) in healthcare are considered relatively insulated from trade tensions and have lower gearing and longer lease expiries, contributing to more stable cash flows.

Secondly, investors can look for S-REITs that are trading at attractive valuation levels. Many blue-chip S-REITs are trading at 6–7% distribution yields, following cumulative corrections of 7.7% in 2020, 15.0% in 2022, and 11.8% in 2024. This underperformance may offer a base for potential mean reversion, especially as fundamentals remain intact. For instance, the FTSE ST All-Share REITs Index posted a negative return of 6% over the 2020 to 2024 period, significantly underperforming the Straits Times Index’s 59% gain.

Lastly, investors can monitor asset enhancement and expansion initiatives by S-REITs. For example, 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 has completed a strategic acquisition in Osaka that is expected to be accretive to its 2024 distribution per unit. These initiatives can enhance the long-term growth potential of S-REITs, making them attractive investment options during market downturns.

In conclusion, while the 11.8% slide in S-REITs returns in 2024 was a challenging period, there are signs that the sector may be entering a recovery phase. Investors who focus on high-quality S-REITs with strong fundamentals, attractive valuation levels, and active asset enhancement initiatives can capitalize on the potential for outperformance in a downturn. As always, it is important to conduct thorough research and consider your investment goals and risk tolerance before making any investment decisions.