It’s been a tough environment for the REIT sector since 2022.

Back then, interest rates saw their steepest climb ever as the US Federal Reserve hiked rates to combat surging inflation.

Although interest rates were reduced by a full percentage point last year, they are still hovering at multi-year highs.

These twin headwinds of high interest rates and elevated inflation are putting pressure on REITs’ distributions.

Faced with these ongoing challenges, should income investors still rely on REITs for their regular flow of passive income?

REITs are adapting

As the sharp interest rate increases started in 2022, REITs have had time to adapt to the changes.

REIT managers are nimble in managing REITs’ debt exposure by swapping more floating rate debt for fixed-rate debt.

Some REITs have also resorted to borrowing in a different currency where the cost of debt is lower to reduce the overall cost of debt.

More importantly, REITs have also learnt to manage their operating expenses better, with some managing to eke out year-on-year increases in their distribution per unit (DPU).

A prime example is CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.

The retail and commercial REIT reported a resilient set of earnings for 2024 with gross revenue inching up 1.7% year on year to S$1.6 billion.

With effective expense control, CICT’s net property income (NPI) improved by 3.4% year on year to S$1.15 billion.

DPU edged up 1.2% year on year to S$0.1088 for 2024.

Mapletree Industrial Trust (SGX: ME8U), or MIT, is another example of a REIT that reported rising DPU.

For its third quarter of fiscal 2025 (3Q FY2025) ending 31 December 2024, gross revenue rose 2% year on year to S$177.3 million.

NPI increased by 2.6% year on year to S$133.2 million as property expenses increased by just 0.1% year on year.

As a result, DPU increased by 1.5% year on year to S$0.0341.

MIT also took up a Japanese-Yen (JPY) denominated loan when it carried out the acquisition of a data centre in Osaka back in May 2023.

The industrial REIT followed up with another acquisition in Japan recently – that of a freehold property with the potential to redevelop into a new data centre.

Because of the greater amount of loans taken up in JPY, the REIT saw its cost of debt fall from 3.2% in September 2024 to 3.1% by December 2024.

The importance of a strong sponsor

The two examples above show that some REITs are coping well with the higher rates and managed to continue to grow their DPU.

Investors should consider REITs that possess a strong sponsor.

Both CICT and MIT have strong sponsors in CapitaLand Investment Limited (SGX: 9CI), or CLI, and Mapletree Investments Pte Ltd, respectively.

Such sponsors can help to lower the cost of borrowing for REITs due to their financial strength and the implicit support they extend to their REITs.

Sponsors can also provide a valuable pipeline of ready assets that can be injected into the REIT, thus eliminating the need to approach third parties for potential acquisitions.

This ready pipeline is a boon for REITs as the external environment may be tough, thus making it difficult to secure a quality asset at a good valuation.

Acquisitions, positive rental reversions and AEIs

Speaking of acquisitions, many REITs have been actively acquiring properties to boost their asset base and help mitigate the drop in DPU.

One of these is Keppel DC REIT (SGX: AJBU).

The data centre REIT completed the acquisition of a 99.49% stake in two data centres back in December 2024.

A fundraising exercise also helped the REIT to lower its aggregate leverage to 31.5% as of 31 December 2024.

For 2024, Keppel DC REIT also eked out a small 0.7% year-on-year increase in its DPU to S$0.09451 on the back of a 10.3% year-on-year increase in gross revenue.

The REIT reported a strong positive rental reversion of around 39% for 2024 which helped to boost rental income.

Over at Frasers Centrepoint Trust (SGX: J69U), or FCT, the REIT saw continued positive rental reversion of 7.7% for fiscal 2024 (FY2024) ending 30 September 2024.

This positive reversion attests to the strong demand for the retail REIT’s portfolio of suburban malls.

FY2023 also rental reversion come in at positive 4.7%.

Apart from acquisitions and rental reversions, REITs can also undertake asset enhancement initiatives (AEIs) to spruce up their assets, create more net lettable area (NLA), and generate organic rental income growth.

FCT did so with the completion of its Tampines 1 AEI back in August 2024.

The AEI created more than 9,000 square feet of NLA and generated a return on investment (ROI) exceeding 8%.

The retail REIT is now lining up Hougang Mall for its next AEI and is targeting an ROI of around 7%.

Get Smart: Selecting the solid REITs

REITs have employed a variety of methods to help grow their revenue despite the headwinds they face.

Income investors can still rely on this asset class for dependable distributions but they need to be selective.

The key is to choose REITs with strong sponsors who are active in acquisitions and AEIs.

You can also look for REITs that report strong positive rental reversions as this number tells you how strong the demand is for their properties.

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Disclosure: Royston Yang owns shares of Keppel DC REIT and Mapletree Industrial Trust.