S-REITs: Rate cycle turns, sector faces renewed pressure

• The US-Iran conflict has triggered an oil price shock that materially changes the interest rate outlook. Rate cuts are off the table globally, given the inflationary impact of higher oil prices.
• As of 1 April 2026, the FTSE ST REIT Index has already fallen 4.9% (since the war) and 6.8% year-to-date. Selling pressure may persist as markets continue to reprice rates.
• Rising SGS yields (SGS 10Y bond yield is up approximately 40 basis points for the month of March to around 2.3%) are compressing the yield spread that previously made S-REITs attractive to income investors.
• Following a downward revision to our book value estimates for the sector, our 2028 target price for Lion-Phillip S-REIT ETF (SGX: CLR) has been lowered to SGD 0.83. This implies limited capital upside of 2.5% from current levels, alongside an average annual dividend yield of 5.7%.
• A selective approach remains essential. We still favour industrial REITs (CapitaLand Ascendas REIT, Mapletree Industrial Trust, Stoneweg Europe Stapled Trust) and Grade A CBD commercial assets (CapitaLand Integrated Commercial Trust) while avoiding rate-sensitive names.

When we published our S-REITs outlook for 2026 in January, the sector appeared to be turning a corner. A series of Federal Reserve (Fed) rate cuts had begun to ease borrowing costs, improve interest coverage, and revive capital market activity. With reasonable valuations, widening yield spreads, and resilient domestic rental fundamentals, the outlook then was constructive.

Related article: S-REITs Outlook 2026: A more constructive year ahead with selective opportunities

Much has changed in the past two months. The escalation of the US-Iran conflict in March 2026 has driven oil prices sharply above USD 100 per barrel and upended the global rate narrative. Rate cuts are no longer the base case, given the inflationary impact of higher oil prices; instead, markets are pricing in renewed tightening across major economies, with the Fed on hold and other central banks turning more hawkish.

Related article: We’re witnessing a turn in the interest rate cycle. Be prepared for rate hikes.

For S-REITs, this shift is significant. Interest rates remain the key macro driver for the sector, shaping financing costs, valuations, and yield attractiveness. The market has already begun to reprice these risks, with the FTSE ST REIT Index down nearly 5% since the war. Further downside remains possible if elevated oil prices persist.

Against this backdrop, we downgrade our stance from constructive to cautious. While domestic fundamentals remain intact in select segments, broad sector exposure is less compelling. We recommend a more defensive positioning, focusing on names with resilient balance sheets while reducing exposure to rate-sensitive and highly leveraged REITs.

What Has Changed Since January 2026

In our January 2026 S-REITs outlook, we outlined a constructive case for the sector on three pillars: easing interest rates translating into improving interest coverage ratios and borrowing costs; widening yield spreads relative to the 10-year SGS bond; and reviving capital market activity as REIT managers resumed growth-oriented strategies.

That backdrop has changed materially. The US-Iran conflict, which erupted in the weeks following our January publication, has triggered a sharp oil price shock. Brent crude oil futures have surged over 40% in March to approximately USD 100 per barrel. Energy prices of this magnitude historically contribute meaningfully to headline inflation, and critically, this shock has arrived when the US was already operating with inflation above the Fed’s 2% target for over five years.

The practical consequence for S-REITs is significant: every pillar of the January bull case is now under pressure (Table 1). With the absence of a rapid and durable de-escalation of the Middle East conflict, the risk-reward for broad sector exposure has become less compelling.

Table 1: Summary of key changes between our view in January and now

Factor	January 2026 View	Updated View (March 2026)
Interest Rate Direction	Gradual rate cuts; six Fed cuts already delivered in 2025	Rate cuts off the table; ECB and BOE likely to hike twice or thrice
SGS 10-Year Yield	2.2% (expected to drift lower)	Rising 40bps in a month, from 1.9% to 2.3%
REIT Yield Spread	3.2% (widening); supportive of sector appeal	Compressing as bond yields rise and REIT prices fall
Capital Market Activity	Reviving; acquisitions and equity markets reopening	Likely to stall again as the cost of capital rises
Macro Shock	No major exogenous shock anticipated	US-Iran war; oil up >40% since the war; Brent crude oil futures ~$100/bbl
Source: FSMOne Research, Trading Economics. Data as of 31 March 2026.

Why Rising Rates Are Particularly Damaging for S-REITs

Real estate investment trusts (REITs) are structurally sensitive to interest rates through three channels: financing costs, valuation, and relative income appeal.

Financing Costs: The Improvement Trend Reverses

One of the most encouraging developments we highlighted in January was the gradual improvement in interest coverage ratios across well-capitalised S-REITs. Six Fed rate cuts in 2025 were beginning to flow through to lower all-in borrowing costs, particularly for REITs staggering their debt maturities through 2026-2027. For example, CICT's all-in interest rate had declined from 3.5% to 3.2%, and its interest coverage ratio improved from 3.0x to 3.7x between mid-2024 and December 2025.

This improving trend is now at risk of reversal. Higher policy rates in foreign markets will directly impact REITs with foreign currency-denominated debt or offshore exposure. Domestically, while the Monetary Authority of Singapore is expected to tighten monetary policy at its April 2026 meeting via the exchange rate (i.e strengthen the SGD), Singapore dollar interest rates (e.g. SORA) are likely to rise in tandem with higher global rates and tighter funding conditions, increasing the cost of floating-rate borrowings. For REITs already operating with leverage above 45%, this poses a meaningful downside risk, as remaining headroom before the 50% regulatory ceiling is increasingly constrained.

The impact will be uneven. REITs with a higher proportion of fixed-rate debt and longer-dated maturities will be relatively insulated in the near term. By contrast, those with a larger share of floating-rate exposure or near-term refinancing needs will feel the pressure sooner.

Valuation Derating: Cap Rates Under Upward Pressure

Rising risk-free rates exert upward pressure on capitalisation rates, which compresses property valuations. During the rate hiking cycle of 2022-2023, many S-REITs experienced book value erosion as appraisers revised cap rates higher. We note that the sector has only recently recovered to trade at approximately 0.99x price-to-book (P/B) as of January 2026, broadly in line with its 10-year average. Fast forward to today, declining share price has brought the sector’s forward P/B lower to 0.92x (as of 1 April 2026). Should interest rates rise materially from here, a renewed round of book value write-downs would push valuations above 1.0x P/B again, reducing the valuation support that underpinned our earlier constructive case.

Figure 1: The sector is now trading at a forward price to book of 0.92x

Yield Spread Compression: The Income Story Weakens

In January 2026, we highlighted that the yield spread between S-REITs (forward yield 5.4%) and the 10-year SGS bond (approximately 2.2% at the time) had widened to 3.2%, providing a compelling income cushion for investors.

That spread is now narrowing from both ends simultaneously: the 10-year SGS yield has risen approximately 40 basis points in March from 1.9% to around 2.3%, while REIT share prices have fallen, pushing forward yields higher (6.0%). However, the sell-off has outpaced any improvement in yield support. Since the onset of the war, the spread has, in fact, compressed slightly from 3.8% to 3.7% over the past month. While this remains above January levels, further rate hikes could push risk-free yields higher and drive additional compression in the spread.

Figure 2: The yield spread is expected to contract as interest rates rise

Our Updated Sector View: Cautious, with Selective Pockets

We do not advocate a wholesale exit from S-REITs. The sector's fundamental underpinnings, such as resilient domestic rental conditions, tight vacancy rates across industrial assets, and a flight-to-quality in Grade A offices, remain broadly intact. What has changed is the macro-overlay. The rate tailwind has become a headwind, and the margin of safety at current valuations has narrowed.

Our approach is therefore selective. We maintain a preference for names where: (1) balance sheets are healthy with lower gearing and predominantly fixed-rate debt; and (2) the underlying sub-sector has structural demand drivers that are independent of the rate cycle.

Table 2: Names that we like

Sub-Sector	Representative Names	Rate Sensitivity	Fundamental Outlook
Grade A Commercial	CapitaLand Integrated Commercial Trust (SGX: C38U)	Moderate	Tightening vacancy; flight-to-quality intact
Industrial / Logistics	CapitaLand Ascendas REIT (SGX: A17U) Mapletree Industrial Trust (SGX: ME8U) Stoneweg Europe Stapled Trust (SGX: SEB)	Moderate	Strong rental reversions; AI-driven demand

Selective Buy: CBD Grade A Commercial and Industrials in Singapore

For CBD Grade A commercial exposure, CapitaLand Integrated Commercial Trust (SGX: C38U) (Leverage: 38.6%, ICR: 3.7x) remains our preferred pick. The fundamental case for Singapore's Core CBD office market remains intact: vacancy has continued to shrink, reaching a record low of 3.3% in 1Q26 according to CBRE, and there is no significant new Grade A supply until 2028, sustaining landlord pricing power. CICT's portfolio composition, anchored by assets like CapitaSpring, Asia Square Tower 2, and CapitaGreen, positions it well for this environment.

Table 3: Singapore Core CBD (Grade A) Office vacancy rates hit a record low in 1Q26

	1Q25	2Q25	3Q25	4Q25	1Q26
Core CBD (Grade A)	5.9%	5.3%	5.1%	4.5%	3.3%
Source: CBRE. Data as of 31 Mar 2026.

In industrials, CapitaLand Ascendas REIT (SGX: A17U) (Leverage: 39.0%, ICR: 3.6x) and Mapletree Industrial Trust (SGX: ME8U) (Leverage: 37.2%, ICR: 3.9x) remain our preferred names. As of 31 December 2025, both continue to demonstrate strong rental reversions (CLAR: +12.0%; MINT: +7.1% for the Singapore portfolio) supported by tight supply, strong 3PL and technology-driven demand, and limited new completions on the horizon. CLAR's disciplined capital recycling, including divestments of mature assets and acquisitions of fully leased, high-specification facilities, gives it the operational flexibility to navigate a more challenging financing environment.

Figure 3: Rental index for industrial properties continued to grow

Stoneweg Europe Stapled Trust: Strong Fundamentals, but Valuation Headwinds Emerging

Stoneweg Europe Stapled Trust (SGX: SEB) (SERT) (Leverage: 42.4%, ICR: 3.1x) continues to stand out among smaller-cap S-REITs, supported by ongoing portfolio repositioning, a stable income outlook, and a well-hedged balance sheet.

Related article: Stoneweg Europe Stapled Trust: 8% yield into a pivotal 2026, too cheap to ignore?

The manager’s pivot towards higher-quality industrial assets (target: 70%) should improve income resilience, while 8% under-rented assets and positive rental reversions support broadly stable DPU into 2026. Notably, SERT faces no material debt maturities until 4Q30, with 94% of debt hedged or fixed, providing strong visibility over financing costs.

Based on our stress test, a 50 bps cap rate expansion would bring leverage to 45.5%, still below the MAS regulatory limit of 50%. While SERT is not immune to potential cap rate expansion, its financing position remains solid, with sufficient headroom to manage gearing without materially affecting financial flexibility or distributions.

A higher-rate environment may slow capital recycling and acquisitions, moderating the pace of portfolio upgrading and near-term growth catalysts. Additionally, EUR/SGD currency fluctuations can introduce some volatility to DPU when translated for Singapore investors.

Overall, we still find SERT attractive at current valuations with forward dividend yields of more than 9%. Notably, SERT trades at a 0.74x forward P/B (as of 1 April 2026), which provides a potential margin of safety for investors.

Valuation: No upside at current levels for the sector

Incorporating higher financing costs and a more conservative outlook, our forecasted book value per share is revised downwards. Applying a fair P/B multiple of 1.02x to our updated estimates, we derive a lower 2028 target price of SGD 0.83 for Lion-Phillip S-REIT ETF (SGX: CLR), implying a modest upside of 2.5% as of 1 April 2026, alongside an annual dividend yield of 5.7%.

Against a macro backdrop of potential rate hikes, we recommend a selective approach rather than broad-based sector exposure. We see greater resilience in names such as CapitaLand Ascendas REIT (SGX: A17U), CapitaLand Integrated Commercial Trust (SGX: C38U), Mapletree Industrial Trust (ME8U) and Stoneweg Europe Stapled Trust (SGX: SEB).

Investors should avoid names that have high leverage and low interest coverage ratios. For instance, Keppel Pacific Oak US REIT (Leverage: 44.1%, ICR: 2.5x), Prime US REIT (Leverage: 45.0%, ICR: 1.7x) and Suntec REIT (Leverage: 41.5%, ICR: 2.1x) stand out on this front.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools.  iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.