JPMorgan upgrades S-Reits as interest rates ease, downgrades Singapore banks

[SINGAPORE] Analysts are turning more positive on Singapore-listed real estate investment trusts (S-Reits) in an environment of declining yields and interest rates, citing greater visibility on distribution per unit (DPU) growth.

JPMorgan on Wednesday (Mar 12) upgraded its rating on S-Reits to “neutral” from “underweight”, on the back of declining Treasury yields.

At the same time, it downgraded its rating on Singapore banks to “neutral” from “overweight”, amid a lower-rate environment.

DBS Group Research said in a report on Monday that it is “more constructive on S-Reits” at the current valuation of 0.8 times the price-to-book ratio, as well as FY2025 yield of about 6.2 per cent.

It said: “Contrary to market expectations, we see a shift in earnings trend, which could come sooner than late-FY2025.”

JPMorgan noted that the 10-year US Treasury yield declined to 4.1 per cent – from  4.8 per cent – on slower growth concerns, its lowest level since December.

“The last three periods of decline in yields led to a significant rebound in Reits and outperformance over banks, over a short period of time,” JPMorgan said.

It anticipates “more buying of Treasuries and potentially a further decline in yields”, should economic data in the US deteriorate further.

JPMorgan observed that over the past few weeks, interest rates in Singapore declined by about 100 basis points (bps), with the one-month compounded Singapore Overnight Rate Average rate now near 2.4 per cent.

This lower-rate environment translates into more pressure on banks’ net interest margins, but brings about a relief in borrowing costs for Reits, it said.

JPMorgan added that a weaker US dollar may provide relief for banks in other emerging-market Asean countries, indicating that Singapore banks would relatively underperform.

At the same time, it also highlighted that idiosyncratic risks remain in specific sectors for Reits, such as the office sector.

JPMorgan’s top picks include CapitaLand Ascendas Reit, CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT) and Keppel DC Reit.

DBS Group Research analysts Dale Lai and Derek Tan noted that financing costs for S-Reits were “nearing their peak”, with some Reits already starting to report some savings in their fourth-quarter results.

They posit that S-Reits’ DPU growth is “back on track”, on the decline in overall portfolio interest costs as well as sustained and stable net property income growth.

The research house forecasts a DPU compound annual growth rate of over 2.1 per cent for FY2025 to FY2026. It expects growth momentum to begin building in the current quarter and accelerate in the second half of this year.

Lai and Tan also pointed out that S-Reits tend to perform better during periods of rate cuts and rate pauses, due to greater visibility on DPU growth.

According to the research house’s base case which assumes no interest rate cuts this year, sensitivity analysis suggests that China-focused retail Reits and hospitality Reits are likely to benefit from cost savings, primarily driven by reductions in floating loan interest payments.

On the other hand, if a 25-bps rate cut occurs in FY2025, DBS Group Research projects this could boost earnings by about 1.2 per cent.

It continues to favour the retail and industrial sub-sectors for their resilient earnings and growth prospects. 

Its top picks include CICT, FCT, Keppel Reit, Mapletree Industrial Trust, Mapletree Logistics Trust and Parkway Life Reit.