These 5 STI REITs recorded a one-month decline in share prices of between -5.3% and -9.3%, largely in line with the broader S-REIT ETF, which saw a -5+% decrease in price over the same period.
| REIT | Ticker | 1M Perf (%) | Yield (%) | P/B (times) | DPU YoY (%) |
| CapitaLand Ascendas REIT (CLAR) | A17U | -9.3 | 5.9 | 1.15 | -1.3 |
| Mapletree Logistics Trust (MLT) | M44U | -9.1 | 6.0 | 0.95 | -10.7 |
| Mapletree Pan Asia Commercial Trust (MPACT) | N2IU | -6.9 | 6.0 | 0.77 | Flat |
| Frasers Logistics & Commercial Trust (FLCT) | BUOU | -6.0 | 6.4 | 0.85 | -12.5 |
| CapitaLand Integrated Commercial Trust (CICT) | C38U | -5.3 | 4.9 | 1.12 | +6.4 |
The recent geopolitical situation saw oil prices rising to as high as US$120 per barrel. Higher oil prices raise inflation concerns, which means that the pace of interest rate cuts may slow.
It’s all about Interest Rates
One of the most important factors impacting REIT prices is interest rates.
REITs carry debt to finance asset acquisitions, so higher borrowing costs reduce distributable income and lower valuations.
Because REITs rely heavily on debt financing, they are sensitive to short term changes in sentiments on interest rates. Even though markets expect rate cuts eventually, timing uncertainty causes short-term volatility.
Recent market expectations that rate cuts may be delayed have pushed global bond yields higher, which reduces the relative attractiveness of REIT yields. When bond yields rise, REIT unit prices often fall to maintain the same yield spread for investors.
In Singapore, a commonly gauge is an average yield spread of 3.4% to 3.9% over the 10-year Singapore Government Bond, which was last at around 2.1%, after falling as low as 1.92% at the start of this month.
This means the yield that investors look at is currently around 5.5% to 6.0%. This also means that of the 5 REITs, FLCT is the only one that looks attractive from a yield perspective. However, this could be the market pricing in further DPU decline as FLCT is the poorest performer on the list here when comparing YoY DPU performance.
It’s also all about Fund Flows
Another factor is investor rotation toward banks and cyclical equities, attracting funds away from yield assets like REITs. This has resulted in weaker demand for REIT units despite stable underlying operations. Market reports have noted that the broader Singapore market has risen even while S-REITs lagged. Sectors with positive momentum include O&M and small cap plays.
A large REIT IPO can also temporarily drain or divert liquidity from the sector. The listing of UI Boustead REIT, a mid cap industrial REIT with a sizeable Singapore portfolio raised nearly S$1B, drawing investor funds into the new issue, resulting in existing REITs to be sold off slightly.
Fundamentals are also important
On the list are 3 Industrial and logistics REITs, represented by CLAR, MLT, and FLCT.
These 3 REITs have been divesting properties or restructuring portfolios, which leads to a reduction in total portfolio income. They have sold underperforming, non core or fully realised assets affecting near-term distributable income.
Logistics REITs have been facing slowing warehouse demand after the pandemic boom. This weakness in existing portfolio, exacerbated by foreign exchange effects, has led to lower contributions as well.
The remaining 2 REITs on the list, Mapletree Pan Asia Commercial Trust & CapitaLand Integrated Commercial Trust are the two biggest commercial REITs listed on the index. MPACT has been facing office demand uncertainty, especially in Hong Kong and China. CICT, the only REIT with a positive DPU YoY growth has performed well as more than 90% of its portfolio is in Singapore with a small percentage in Germany and Australia.
While divestments can lower gearing and interest expense in the immediate term and allow for room to carry out acquisitions on better assets, improving portfolio quality in the longer run, they often lead to short-term DPU decline, which can cause price weakness.
Fundamentally, distributable income determines yield and is the key measure of valuation. Of these 5 REITs, only CICT saw a positive DPU YoY while MPACT saw flat DPU YoY. CLAR, MLT AND FLCT saw negative DPU with MLT & FLCT recording double digit declines, in part due to lower income on existing assets and in part due to the impact of divestments.
Closing statements
REIT prices often move more on interest rates and yields than property fundamentals. The recent >5% decline across these five S-REITs is primarily driven by macro market conditions rather than operational weakness.
Rising bond yields, capital rotation into other sectors, currency effects on overseas portfolios, and some DPU pressure have collectively reduced investor demand for REIT units in the past month.
In other words, the drop reflects sector sentiment and financial conditions more than deterioration in occupancy, rental demand, or property fundamentals.
That’s why even strong names, such as the 5 mentioned here which have the biggest market caps in the sector, can drop together with the sector, along with the weaker REITs.
However, in the longer term, at the end of the day, there is a certain profile of REIT that will outperform.
CICT ticks many of the boxes based on its fundamentals. CICT’s portfolio property value rose by 5.2% YoY to S$27.4 billion, due to the better performance of the Singapore portfolio and the step-up acquisition of CapitaSpring’s commercial component.
CICT owns prime retail malls and office buildings, many of which are located in central Singapore. Its portfolio includes well-known assets such as ION Orchard, Plaza Singapura, Raffles City Singapore, and Capital Tower. These landmark properties attract strong tenant demand and consistent shopper traffic.
Consequently, portfolio committed occupancy stood at 96.9%, led by retail (98.7%), integrated development (97.7%) and office (95.7%).
CICT also looks toward value creation via asset enhancement initiative (AEI). For example, Capital Tower, a Grade A office building, will undergo an AEI at an estimated cost of S$25 million to reposition Level 9 into a community space and create a higher-yielding F&B space on Level 1.
CICT also has a robust capital management structure with a healthy aggregate leverage of 38.6%, while the average cost of debt was 3.2%, down from the 3.6% a year ago. About 74% of total borrowings remained on fixed interest rates with an average term-to-maturity of 4.0 years, reducing refinancing risks in any single year.
Therefore, we think that a resilient REIT such as CICT would be the best poised to weather uncertain times and outperform the sector.
Join us for our next webinar session to find out how we identify and select REITs for higher and sustainable yields.
