RHB names its S-Reit top picks on softer interest cost pressures, minimal tariff impact

[SINGAPORE] RHB analysts maintained their “overweight” call on Singapore-listed real estate investment trusts (S-Reits) amid “softer interest cost pressures” – particularly for Singapore-centric Reits. 

This comes as most S-Reits under RHB’s coverage report lower overall interest costs, as “sharp falls” in domestic rates have benefited interest costs, said RHB analyst Vijay Natarajan in a Tuesday (May 20) research note. 

“The majority (of S-Reits are) reporting lower overall interest costs. The fall in benchmark rates has also resulted in lower yields for alternative options (ie Treasury bills and Singapore savings bonds) and rising yield spreads for S-Reits – potentially creating room for fund inflows to the sector if the tariff overhang is removed,” he said. 

“With benign sector valuations, we still see medium-term risk-rewards in favour of S-Reits,” he noted.  

Top picks include CapitaLand Integrated Commercial Trust (CICT), CapitaLand Ascendas Reit (Clar), Frasers Centrepoint Trust (FCT), Keppel Reit, and Aims Apac Reit – all of which were assigned a “buy” call. 

Cautiously positive guidance, strong operating numbers

The majority of S-Reits under RHB’s coverage reported in-line results with operational numbers remaining “strong”, Natarajan said. 

“More than half of the S-Reits that reported financials… saw positive quarter-on-quarter and year-on-year net property income growth, supported by stable occupancy and positive rent reversions,” he said. 

A key positive was “softer interest cost pressures”, particularly for S-Reits focused on Singapore. 

There were no major changes to operational performance guidance, which is “cautiously positive”, as the direct impact of US tariff policies has been “minimal” so far, while risks of uncertainties stemming from them remain clouded. 

Hence, a majority of the S-Reits under coverage foresee stable occupancy rates and positive rent reversions, barring certain overseas markets and segments. 

Singapore-centric Reits favoured to “outperform” 

Among S-Reits, Natarajan thinks large-cap, high-quality Singapore-centric Reits could do well. 

In particular, he favours industrial, office, healthcare and suburban retail sub-sectors, while that of hospitality is the least preferred. 

“Amidst a currently volatile macroeconomic backdrop, we expect Singapore-centric Reits to continue to relatively outperform and see larger fund inflows.” 

This comes as stable and supportive government policies post-election could create room for fiscal policy support in the event of an economic downturn, which is a positive for the real estate sector, Natarajan said. 

Noting that the three-month key benchmark Singapore overnight rate average has declined 70 basis points year to date, he adds that falling domestic interest rates are lowering Singapore-dollar denominated borrowing costs. 

“Nearly three quarters of S-Reits saw flat to moderate interest cost declines quarter on quarter, with the largest declines seen among Singapore-centric S-Reits,” he said. 

“In addition, most of the S-Reits also noted slight reductions in bank loan margins amid a flush of liquidity in the banking system.”

Reits that logged the highest quarter-on-quarter interest cost declines include Far East Hospitality Trust (60 basis points), OUE Reit (50 basis points), Sasseur Reit (30 basis points), First Reit (30 basis points) and Acrophyte Hospitality Trust (30 basis points).

Moreover, the stability of the Singapore dollar – benefiting from “capital flight-to-safety” – and the Republic’s growing financial hub status, could further benefit Singapore-centric Reits, he said.