S-REITs: Selectivity remains key in a higher-for-longer rate environment

• As of 11 June 2026, the FTSE ST REIT Index has fallen around 3.9% year-to-date, underperforming the STI (+9.7%) and trades at approximately 0.91x forward price-to-book (10Y average: 1.00x).
• A near-term, sector-wide recovery is unlikely given lingering global oil supply disruptions that could keep prices elevated and inflation sticky well into 2027.
• Industrial and Grade A CBD office REITs remain our preferred sub-sectors, supported by structural demand that is largely independent of the interest rate cycle.
• Balance sheet quality, namely low gearing and high interest coverage, is critical in determining which REITs can sustain or grow distributions.
• We maintain our 2028 target price of SGD 0.83 for the Lion-Phillip S-REIT ETF (SGX: CLR), implying little to no upside from its closing price of SGD 0.82 as of 11 June 2026, alongside an annual dividend yield of 5.7%.

Singapore REITs (S-REITs) have faced selling pressures amidst the Middle East conflict. As of 11 June 2026, the FTSE ST REIT Index had delivered a negative total return of 3.9% year-to-date, lagging the STI, which delivered a positive 9.7% total return over the same period.

Figure 1: The S-REITs sector has underperformed the STI year-to-date

The sector now trades at around 0.91x forward price-to-book, a discount to its 10-year historical average of roughly 1.00x. For income-focused investors, this naturally raises the question of whether the sell-off has created an opportunity, or whether more pain lies ahead.

Figure 2: Forward Price to Book Ratio continues to be at a discount to its 10-year historical average of about 1.0x

Our house view remains that interest rates will stay higher for longer, and we believe this has important implications for how investors should approach the sector. While we do not advocate avoiding S-REITs altogether, we maintain that a selective approach, rather than broad-based exposure, is the more prudent strategy at this juncture.

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

Valuations have not fully priced in higher-for-longer rates

On the surface, a forward price-to-book ratio of 0.91x, below the sector's long-term average, may appear to represent an attractive entry point. However, we caution against reading too much into this apparent discount.

Our base case is that rate cuts remain off the table given persistent inflationary pressures. Should Singapore Government Securities (SGS) yields continue to rise, this raises the risk of a further round of book value write-downs driven by cap rate expansion. In this scenario, reported price-to-book ratios could move back above 1.0x even without further share price declines, simply because book values themselves would be revised lower.

This would effectively erode the valuation cushion that currently appears to support the sector. For this reason, we do not view the broad S-REIT sector as offering an attractive entry point at current levels. Investors should resist the temptation to view the recent underperformance purely through the lens of valuation support, and instead focus on the quality and resilience of individual names.

Near-term recovery catalysts remain limited

We see limited scope for a near-term, sector-wide recovery in S-REITs, and believe the bar for a genuine re-rating is higher than many investors may appreciate. A key reason for this is the lingering impact of recent global oil supply disruptions.

Even if geopolitical tensions in the Middle East were to ease immediately, the inflationary pressures underpinning our higher-for-longer rate view would not dissipate quickly. Global oil reserves, including commercial, in-transit, and strategic stockpiles, have been heavily drawn down, and clearing existing shipping backlogs alone could take months.

Beyond this, major oil-consuming nations are likely to aggressively rebuild depleted strategic reserves, which would sustain elevated demand and keep oil prices higher for an extended period, with some estimates suggesting supply deficits could persist well into 2027. The International Energy Agency (IEA) has highlighted that global buffer levels have fallen to unprecedented lows, leaving markets highly sensitive to any further shocks.

For S-REITs specifically, a durable recovery would require more than a de-escalation headline. It would require concrete, sustained evidence that inflationary pressures are easing, giving central banks genuine room to begin cutting rates.

On the domestic front, a meaningful and sustained compression in SGS yields would help restore the yield spread that makes S-REITs attractive relative to risk-free alternatives, but this too is contingent on the broader global rate trajectory shifting in a more dovish direction. As of 11 June 2026, the 10-year SGS yield stood at 2.09%, above the pre-war level of 1.95%.

While we note that the yield spread between S-REITs and 10-year SGS bonds has widened slightly from pre-war 3.81% to 3.89% (as of 11 June 2026), this is primarily driven by the decline in share prices rather than dividend growth. Hence, investors should not be fooled by the widening yield spread alone.

Figure 3: Yield Spread between FTSE ST REIT Index and 10Y SGS Bond

Until such evidence emerges, we expect the sector to remain under pressure, and would caution against positioning for a near-term, broad-based rebound.

Related article: Singapore inflation and monetary policy: Stronger SGD to absorb imported oil price shock

Where we see relative resilience: Industrials and Grade A CBD Office

Within the S-REIT universe, we continue to favour the industrial and Grade A Central Business District (CBD) office sub-sectors, both of which benefit from structural demand drivers that are, to a meaningful degree, independent of the interest rate cycle.

In the industrial space, demand from third-party logistics (3PL) operators and technology-driven tenants continues to support tight vacancy rates and positive rental reversions. CapitaLand Ascendas REIT and Mapletree Industrial Trust, for example, reported rental reversions of 10.5% and 6.2% respectively for their Singapore portfolios for the latest quarter, against a backdrop of limited new supply. As this demand is driven by structural shifts in supply chain and technology requirements rather than the broader macroeconomic cycle, we believe these REITs are better positioned to weather a higher-for-longer rate environment.

Similarly, for Grade A CBD office assets, Singapore's core CBD vacancy rate hit a record low of 3.3% in the first quarter of 2026, with no significant new supply expected until 2028. This persistent scarcity of quality office space supports landlord pricing power regardless of where we are in the interest rate cycle, providing a degree of insulation that we believe is increasingly valuable in the current environment.

Identifying REITs best positioned to sustain distributions

Beyond sub-sector exposure, balance sheet quality is, in our view, the single most important factor in determining which S-REITs can sustain or grow distributions in a higher-for-longer rate environment. Specifically, we look for two characteristics:

1.    low gearing (below 40%)

2.    high interest coverage ratios (ICR) (above 2.5x)

Names that screen well across these criteria include CapitaLand Integrated Commercial Trust, with leverage of 38.5% and an ICR of 3.8 times and Mapletree Industrial Trust, with leverage of 34.0% and an ICR of 4.0 times. Each of these REITs combines a relatively conservative balance sheet with exposure to sub-sectors that benefit from structural, rather than purely cyclical, demand.

Since our last update, CapitaLand Ascendas REIT's aggregate leverage has risen to 42.0% as of 1Q26 (4Q25: 39.0%), exceeding our preferred threshold. This was primarily driven by the timing of recent acquisitions, namely DHL Canal Winchester in the US, a portfolio of six Grade A logistics properties in Spain, and a 50% stake in Ascent (Business Park) in Singapore, ahead of the completion of its SGD 903.5 million equity fund raising (EFR). Importantly, leverage is expected to fall back to approximately 37.3% in April 2026, assuming net proceeds from the EFR are used to repay debt.

Of the gross EFR proceeds, SGD 603.0 million (as of 11 June 2026) has already been deployed, including SGD 30.9 million reallocated to debt repayment following CLAR's decision to drop a previously announced light industrial acquisition in Singapore. The remaining SGD 300.5 million is earmarked for two identified acquisitions, a logistics estate at 25 Loyang Crescent and a ramp-up logistics facility in Singapore, both of which are acquisition-specific deployments rather than open-ended commitments.

In short, we view the current elevated leverage as transient rather than structural, and continue to recommend CLAR given its strong underlying portfolio fundamentals, ICR of 3.5 times, and the clear deleveraging pathway already in motion.

Within the smaller names, we spotlight Digital Core REIT (Leverage: 39.0%, ICR: 3.3x) and Stoneweg Europe Stapled Trust (SERT) (Leverage: 42.4% as of 31 Dec 2025, ICR: 3.1x as of 31 Dec 2025). We like Digital Core REIT underpinned by strong structural demand for AI-driven data centre capacity, evidenced by the +44% rental reversion in 1Q26.

Conversely, we would highlight that REITs with leverage above 40% and interest coverage ratios below 2.5 times face meaningful distribution risk in this environment, as rising refinancing costs would likely erode distributable income over time, absent the mitigating factors discussed above. Examples of such S-REITs include Prime US REIT (Leverage: 45.2%, ICR: 1.6x) and Keppel Pacific Oak REIT (Leverage: 43.7%, ICR: 2.5x). Investors should pay close attention to these metrics when assessing individual S-REITs, rather than relying on headline yield alone.

Separately, while SERT's leverage of 42.4% sits above our 40% threshold, it remains comfortably within the Board's policy ceiling of 45% and loan covenants, and as projected valuation gains and planned asset sales are realised. It is also worth noting that SERT is a Stapled Trust (REIT and Business Trust); hence, it is not subject to MAS’s regulatory limitations. Regardless, SERT remains committed to maintaining leverage below MAS’s aggregate leverage limit of 50%.

More importantly, the quality of SERT's debt profile provides significant downside protection: 87% of interest exposure is hedged or fixed through late 2027 following an extension of its EUR 160 million interest rate hedge, the weighted-average debt maturity exceeds five years, and there is no refinancing requirement until 2030 (excluding the evergreen RCF maturing late 2028).

We therefore remain comfortable with SERT's current capital structure, and continue to like the trust for its resilient income profile, supported by structural logistics rental growth (+7.6% reversion) and exposure to data centres in the development stage via the AiOnX data centre development fund, offering meaningful NAV upside optionality.

Conclusion

While the recent underperformance of S-REITs may appear to present a valuation opportunity, we believe a higher-for-longer interest rate environment, compounded by lingering global oil supply disruptions, means the sector has not yet fully priced in the risks ahead. We do not see compelling near-term catalysts for a broad-based recovery and would caution against viewing current valuations as an attractive entry point for the sector as a whole.

In terms of valuations, we maintain our 2028E target price of SGD 0.83 for the Lion-Phillip S-REIT ETF (SGX: CLR), which presents little to no upside as of the closing price on 11 June 2026 of SGD 0.82, alongside an annual dividend yield of 5.7%.

That said, we remain constructive on selective opportunities within the sector. We continue to favour S-REITs with stronger interest coverage ratios, lower gearing (or a credible path back to it), and exposure to sub-sectors with structural demand for their underlying assets, namely industrial and Grade A CBD office.

Within this context, CapitaLand Integrated Commercial Trust (SGX: C38U), CapitaLand Ascendas REIT (SGX: A17U), and Mapletree Industrial Trust (SGX: ME8U) stand out as names that combine balance sheet resilience (or a clear deleveraging trajectory, in CLAR's case) with favourable underlying fundamentals, positioning them comparatively well to sustain or grow distributions even as the broader sector navigates a more challenging rate environment.

Among smaller names, we like Digital Core REIT (SGX: DCRU) and Stoneweg Europe Stapled Trust (SGX: SEB), supported by their attractive dividend yields, resilient balance sheets and attractive valuations.

Related article: Digital Core REIT 1Q26 Earnings Update: Strong 44% rental reversion supports 7.0% yield

Related article: Stoneweg Europe Stapled Trust: Resilient income, data centre strategy gains traction

Disclaimer: 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.