The higher interest rate environment has hit share prices of banks in both the US and Singapore, as rate hikes are typically used to combat inflation and slowing economic growth. Share prices of US banks have fallen more than 10% YTD while share prices of Singapore banks have stayed in a small positive range.
Banks have been hit hard. Needless to say, S-REITs have been hit even harder, as interest rates impact REITs more directly. The broader iEdge S-REIT Index has fallen 6% in the past month with most REITs declining.
Looking at the list, it is not just smaller REITs or those with US or emerging market exposure that are dropping significantly. Even names like Frasers Logistics & Commercial Trust (FLCT) have fallen more than 10% in 1 month.
Higher interest rates are being priced in as a tool to combat inflation. This time, inflation may rise as a result of higher oil prices. This cost factor cannot be fully mitigated by interest rates changes, as it depends on broader global conditions.
The questions now is: are REITs a buy now, or is it still too early with more downside to come?
1) Absolute valuation: Historical prices
Looking at the broader index, the 52-week low, which occurred when President Trump first announced Tariffs, also marked a 5-year low for the index (levels of 908). The index quickly rebounded to around 1,000 as rhetoric stabilised. It is now just about 3% away from that level.
Therefore, based on this measure, S-REITs could start to look like a worthy buy at these levels. For those with better luck (and timing), they could either try to get in at the same levels as Apr 2025 or even wait for a day of capitulation in the market.
Many investors believe that a day of capitulation (“strong selling activity”) in the market is required to mark the trading bottom, and one of the best times to enter the market.
2) Relative Valuations
The Inflation rhetoric implies that interest rates may stay at current levels for longer (higher for longer) or even go up if necessary to combat high inflation. Markets have reversed from expecting cuts to pricing in hikes or no cuts. US Bond yields have surged with the 10-Year at ~4.4% and the 2-Year at ~3.9%.
Singapore’s’s SORA has however remained stable in spite of this, no doubt in part due to the demand for the Singapore Dollar as a safe haven currency. However, another measure, the 10-Year Bond Yield has risen from just under 2% at the start of March to about 2.4% by the end of March.
When longer-term yields rise while near-term (short-term) yields stay flat or rise less, it is called a bear steepening of the yield curve. This scenario generally signals market expectations of an overheating economy, rising inflation, or higher future borrowing costs.
REITs are typically compared to bonds as both are yield plays. A higher bond yield would mean that if a REIT’s distribution yield does not increase, the REIT becomes less attractive relative to bonds.
With reference to the left chart above on yield spreads, the yield spread (green line) is about 3.3% as at December 2025. To maintain the total yield at 5.7% (3.3%+2.4%), compared to 5.3% (3.3%+2%) at the start of the month, REIT prices will have to adjust down by about 7% just to keep to the same yield spread. Notably, the iEdge S-REIT index has already declined 6% in the month of March.
3) Fundamental valuations
Looking at the right chart on distribution yields, the dividend yield (green line) for the index has declined, with current yields less than 5% as at December 2025. Higher borrowing costs, coupled with higher property operating costs means that there is a double whammy on the distribution per unit. Oil affects property operating costs in various ways, including higher utility expenses and increased costs for maintenance, construction, and renovation.
Rising fuel costs can also affect demand for logistics facilities. While last-mile facilities may see higher demand to cut transportation costs, overall supply chain costs still increase, potentially affecting the tenant’s financial strength. In the longer term, this could then impact the rental market, leading to a triple whammy as the revenue of REITs also get impacted.
Temporary or permanent shock?
The key question here then is whether this is a temporary or permanent shock. A temporary shock refers to a short term expectation of higher interest rates, and actual short term rates may not ever reach that level. A permanent shock refers to rates being held higher for longer (mid to longer term).
There are many reasons for rate hikes. Looking back at the most recent rate hike cycle in 2022, rate hikes were needed to control widespread inflation and an extremely strong and vibrant economy. This was a result of many countries carrying out fiscal policies to boost their economy amidst COVID-19 and then having to taper back growth as countries try and catch up as they emerge from the pandemic. Unemployment rates were also somewhat low and resilient. The consequence was that multiple rate hikes were required and rates were kept elevated to continue to exert downward pressure on inflation.
This time, while inflation could remain high for long if Oil prices continue to remain elevated, other drivers of inflation such as Services and Shelter could decline, offsetting cost push factors such as Oil. Some economists also believe that built-in inflation or inflation expectations are itself a key driver of inflation. While it is unclear how this would play out, it seems unlikely now that it would be as bad as 2022.
The worst outcome from an economist perspective is Stagflation which is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
Are REITs a buy now or too early with more downside to come?
There are many references to how stocks tend to outperform in the timeframes after a huge dip, especially those triggered as a result of conflict. Many also think markets may be overreacting to inflation spike. If growth weakens, Central banks may also still end up having to cut rates.
Looking at REITs specifically, fundamentals are also not currently deteriorating and REITs historically perform well after rate peaks, not before. The outlook for this year was improving before this shock occurred.
Here we can think of 3 types of investors:
- Scenario A: Risk Adverse – You think rates will stay high for months. Therefore it is too early to enter. You expect continued volatility. Downside risks exacerbate highly leveraged REITs as well as weak sectors
- Scenario B: Trader – You think this is a temporary oil spike but find it difficult to time the market. Therefore, you may start accumulating gradually.
- Scenario C: Long-term income investor – You think REITs are already relatively cheap and are ok to accumulate at current levels.
In our opinion, everything seems cheaper now because the selloff is macro-driven, not fundamentals of a particular sector breaking down.
However, the fact is that from a macro perspective, conditions have yet to stabilise. While stocks are no longer expensive, they are also not screaming cheap either.
Join us to find out how Chris Ng uses his dividend income from REITs to support his family after he FIRE’d at the age of 39. Register here.
