Amid a backdrop of declining yields and interest rates, analysts have grown more optimistic about Singapore-listed real estate investment trusts (S-REITs), citing greater transparency in distribution per unit (DPU) growth. On Wednesday, March 12, JPMorgan upgraded its rating on Singapore REITs from "underweight" to "neutral," while downgrading Singapore banks from "overweight" to "neutral" in light of the low-interest-rate environment.

DBS Group Research expressed a more positive outlook on S-REITs in a Monday report, noting their current valuation at 0.8 times price-to-book ratio and a fiscal year 2025 yield of approximately 6.2%. The report highlighted a shift in earnings trends that could materialize by the end of FY2025, contrary to market expectations.

JPMorgan pointed out that the 10-year U.S. Treasury yield has dropped to 4.1%, its lowest since December, due to concerns over slowing economic growth. The bank observed that past yield declines have led to significant rebounds in REITs, outperforming banks in the short term. Should U.S. economic data worsen further, JPMorgan anticipates increased Treasury purchases and potentially lower yields.

In Singapore, interest rates have decreased by about 100 basis points in recent weeks, with the one-month compounded Singapore Overnight Rate Average now near 2.4%. This low-rate environment exerts pressure on banks' net interest margins but also reduces borrowing costs for REITs. JPMorgan added that a weaker U.S. dollar could provide relief to banks in other emerging ASEAN markets, suggesting relative underperformance for Singapore banks. However, specific sectors within REITs, such as office space, still face unique risks.

JPMorgan's top picks include CapitaLand Ascendas REIT, CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT), and Keppel DC REIT. DBS analysts Dale Lai and Derek Tan noted that S-REITs' financing costs are "near their peak," with some REITs already reporting savings in their fourth-quarter earnings. They believe DPU growth for S-REITs is "back on track," supported by declining overall portfolio interest costs and steady net property income growth.

The research house forecasts a compound annual growth rate of over 2.1% for DPU from FY2025 to FY2026, with momentum expected to build this quarter and accelerate in the second half of the year. Lai and Tan also observed that S-REITs tend to perform better during periods of rate cuts and pauses due to higher visibility in DPU growth.

Under DBS's base case scenario, which assumes no rate cuts this year, sensitivity analysis suggests that China-focused retail REITs and hospitality REITs could benefit from cost savings, primarily due to reduced floating loan interest payments. Conversely, a 25-basis-point rate cut in FY2025 could boost earnings by approximately 1.2%. DBS continues to favor the retail and industrial sub-sectors for their robust earnings and growth prospects, with top picks including CICT, FCT, Keppel REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, and Parkway Life REIT.