In the second instalment of our Singapore Series, we zoom in on the SREITs sector, which looks set to be boosted by new policy initiatives and the latest inflation figures
Low Soo Fang
Portfolio Manager, Asia equities
- The Singapore budget and Equity Market Development Programme is supportive of SREITs
- CPI data released this week points to easing inflation. This increases the scope for lower interest rates, which is favourable for the REITs sector
- Our preference is for retail, data centre and industrial REITs
A few weeks ago, the iEdge S-REIT index was at a 10-year low, excluding its temporary plunge during Covid. However, recent announcements have put in place tailwinds that, if the current Singapore stock market rally is anything to go by, could lead to a meaningful SREITs recovery this year.
Policy impetus
The good news started with the Singapore budget. As mentioned in our Research Note last week, this year’s market-friendly budget included direct SREITs incentives such as the extension of tax concessions for SREIT providers. The government hopes that this will encourage more SREIT listings while also improving the bottom lines of existing providers. In addition, the focus on retail consumption and key industries could also indirectly support such real estate sub-sectors as shopping malls and data centres.
And even before developers could take a breath, this week saw the release of yet more stimulus measures for the sector. As promised, the MAS Review Group laid out a few bold plans to revive stock market trading volumes, liquidity and valuations. In particular, S$5 billion will be injected into the market. SREITs comprises about 12 percent of the Singapore stock market, but given a lower average capitalisation, they could benefit disproportionately.
Macro-economic impetus
While these measures alone are enough to reinvigorate investor sentiment, SREITs also stand to benefit from recent economic data releases. Singapore inflation figures for January 2025 came in lower than expected, with core inflation registering 0.8 percent year-on-year, a level not seen in three years. This was also significantly below December’s 1.7 percent, the consensus forecast of 1.5 percent.
The easing inflation trend leaves room for further monetary easing and suggests that Singapore government bond yields may potentially continue their downward trajectory. The Singapore 6-month Treasury Bill yield has already fallen from a high of 4.5 percent in December 2022 to 2.9 percent today. This suggests that the average SREITs dividend yield, currently running at around 6.5 percent, will become increasingly attractive to investors.
SREIT dividend yields also compare favorably to the average for equity and other bond investments, and is among the highest in the world. They are also at levels comfortably above their historical averages and there is therefore scope for the sector to be re-rated.
Fig 1: Yield spread compression for SREITs vs other countries/regions
Source: Bloomberg/ UOBAM, 31 Jan 2025
Which subsectors have the highest potential?
Given the drivers described above, we recommend that investors focus on the higher growth subsectors, and those that are interest rate sensitive but undervalued. In our view, these include:
- Retail REITS - We have a preference for suburban malls over prime properties
- Data centre REITs - Despite some re-thinking about the amount of hardware and space required to support AI initiatives in the wake of China’s DeepSeek launch, we continue to expect secular demand growth and a revaluation for this subsector
- Industrial REITs – We have a preference for logistics REITS, and are more cautious in relation to business parks.
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