Clearer skies for S-REITs

AMID geopolitical uncertainties, moderating inflation is expected to create a more supportive environment for Singapore real estate investment trusts (S-REITs).

As the likelihood of a prolonged interest rate upcycle fades, improving operating conditions are expected to lift the logistics, industrial and hospitality segments, while selective stock picking remains the preferred investment approach.

Reiterating its positive stance, UOB Kay Hian (UOBKH) Research keeps the sector at “overweight”, saying: “The threat from higher inflation has moderated, which reduces the probability and intensity of US rate hikes.”

Its top picks are CapitaLand Integrated Commercial Trust (CICT), Frasers Logistics & Commercial Trust (FLT), NTT DC-REIT (NTTDCR), United Industrial REIT (UIB-REIT), CapitaLand Ascott Trust (CLAS), and Mapletree Pan Asia Commercial Trust (MPACT).

UOBKH Research pegs its target price for CICT at S$3.06, FLT at S$1.30, NTTDCR at S$1.43, UIB-REIT at S$1.17, CLAS at S$1.42, and MPACT at S$1.75.

The research house had earlier attributed the improved outlook to the recent US-Iran ceasefire, which is now off the table as of time of writing, which had led to lower energy prices.

War is inherently inflationary. Conversely, peace leads to an easing in inflation.

While the Russia-Ukraine conflict remains unresolved, the brokerage says prolonged fighting is placing increasing pressure on Russia’s finances.

It points to rising military expenditure, declining oil and gas revenue, higher debt servicing costs and a widening fiscal deficit, arguing that these pressures could eventually encourage negotiations.

“Russia suffers from enlarged fiscal deficits, which are exacerbated by lower energy prices; this could eventually force President Vladimir Putin to the negotiation table,” it adds.

It believes recent developments point to a more benign interest rate environment rather than the start of a sustained tightening cycle.

“We see ‘benign’ rate hikes on the cards, likely to be short-lived, aimed at recalibrating appropriate restrain and reasserting the Fed’s independence. This is not an interest rate upcycle,” it explains.

Favoured picks

UOBKH Research cites that US Federal Reserve (Fed) chair Kevin Warsh had reiterated during the European Central Bank’s Forum on Central Banking that “inflation risks have come down” while reaffirming the central bank’s commitment to price stability.

It also notes that the Federal Open Market Committee expects core personal consumption expenditure inflation to ease from 3.3% in 2026 to 2.5% in 2027.

Lower energy prices reinforce that view. The research notes that West Texas Intermediate crude oil prices have fallen sharply as the Strait of Hormuz gradually reopens, while jet fuel prices have also corrected significantly, reducing inflationary pressures.

Despite the improving macroeconomic outlook, the research says S-REITs have yet to reflect the changing environment.

“The S-REIT sector has been clobbered since the onset of joint US-Israeli air strikes against Iran despite encouraging S-REITs results reported for the second half of 2025 (2H25) and the first quarter of 2026 (1Q26),” UOBKH Research says.

It notes that the FTSE ST REIT Index fell 6.9% in March before recovering only 1.9% in 2Q26.

Among sector preferences, logistics REITs are expected to benefit as concerns over fuel costs and freight rates ease, reducing risks for logistics operators and transportation companies.

UOBKH Research prefers FLT, citing its consistent achievement of full occupancy across logistics properties in Australia, Europe and the United Kingdom.

It also says the trust has backfilled 83% of the former Google space at Alexandra Technopark, with most new leases commencing by January 2027.

Industrial REITs are also expected to gain as supply chain efficiency improves and manufacturers face less risk from disruptions and reciprocal tariffs.

Within the sector, UOBKH Research favours UIB-REIT, highlighting its exposure to tenants in the automotive, aerospace and avionics industries, including AUMOVIO, Rolls-Royce Solutions, Safran Helicopter Engines Asia and Safran Electronics & Defence Services Asia. It says this segment is expected to account for 22% of gross rental income after a build-to-suit integrated aerospace facility at Seletar Aerospace Park begins contributing in the first quarter of financial year 2029 (FY29).

Hospitality REITs are also expected to receive a lift as lower jet fuel prices reduce airfares and support a recovery in tourism.

UOBKH Research prefers CLAS, pointing to its geographically diversified serviced residence portfolio as well as its expansion into longer-stay student accommodation and rental housing.

It also recommends accumulating CICT, MPACT and NTTDCR.

CICT is highlighted as the largest S-REIT, with dominant positions in suburban and downtown retail malls as well as Grade A offices in Raffles Place and Marina Bay.

Singapore accounts for 95% of its portfolio valuation, while the trust recently issues S$300mil of five-year fixed-rate green notes at a coupon of 2.18%.

For MPACT, Singapore contributes 66.5% of group net property income. VivoCity records 7.6% year-on-year growth in net property income in financial year 2026 alongside positive rental reversions of 14.1%, while Festival Walk posts higher tenant sales and shopper traffic in the fourth quarter.

NTTDCR is exploring the acquisition of a hyperscale data centre in Frankfurt to increase exposure to Tier 1 markets. The trust also signs 2,400 KW of new leases across three facilities, with portfolio occupancy expected to rise to 98% in the first quarter of FY27 after the leases commence.