Interest costs fall for S-Reits in Q1, but US tariffs cloud outlook

[SINGAPORE] Interest costs eased for more Singapore-listed real estate investment trusts (S-Reits) in the first quarter of FY2025, even as looming US tariffs cast a shadow over their prospects for the second half of the year.

Nearly three-quarters of S-Reits saw flat to moderate interest cost declines in Q1 compared to a year ago, said Vijay Natarajan, an analyst with RHB Bank, following the release of S-Reits’ Q1 results and business updates.

Singapore-focused S-Reits had the largest drop in interest costs, with Far East Hospitality Trust (FEHT), OUE Reit and Sasseur Reit among those that had the largest quarter-on-quarter declines.

While most S-Reits have been unaffected by the global tariffs imposed by the US administration so far, there are indications that they could have an indirect impact on S-Reits in the second half of this year, said analysts.

“Tenants are cautious to sign long leases, and investment and divestment activity have slowed as buyers and sellers are revisiting underwriting assumptions,” said Krishna Guha, analyst at Maybank Securities.

Q1 performance

Most Reits and property trusts did not disclose distribution details in their quarterly updates.

Nevertheless, of the 13 trusts that provided distribution per unit (DPU) figures for Q1 in their latest results or business updates, six reported year-on-year declines, data compiled by The Business Times showed.

There was an almost even split across the 27 S-Reits that reported revenue growth, with 14 of them posting higher growth. Across the 31 trusts that reported their net property income (NPI), 17 registered a decline.

Analysts said that the latest results reported by S-Reits were broadly in line with their expectations.

The majority of S-Reits under RHB’s coverage reported in-line results with operational numbers remaining “strong”, said Natarajan.

“More than half of the S-Reits that reported financials… saw positive quarter-on-quarter and year-on-year net property income growth, supported by stable occupancy and positive rent reversions,” he said.

Likewise, OCBC’s research team said in a note on May 15 that the overall DPU for the 10 counters under its coverage fell 2.8 per cent year-on-year. In terms of valuation, the current price-to-book ratio is still “undemanding” at 0.82 times as it is still below the eight-year average of 0.98 times.

Hospitality sector hit

Analysts said the hospitality sub-sector was among the worst performers in Q1, as revenue per available room (RevPar) declined year on year due to fewer major concerts.

“This hurt hospitality S-Reits with significant geographical concentration locally,” noted OCBC. FEHT’s RevPar fell 6 per cent, while CDL Hospitality Trust saw a 15.8 per cent drop compared to a year ago.

On the other hand, the retail sub-sector turned in a “resilient” performance.

Darren Chan, a senior research analyst at Phillip Securities Research, said that S-Reits with suburban retail assets, which saw rental reversions in the high single digits, were supported by consumers’ focus on essential spending.

However, retail assets more exposed to the hospitality sector, such as those in Starhill Global Reit and Suntec Reit’s portfolios, had lower shopper traffic and tenant sales year on year. This was due to the absence of high-profile events and more cautious consumer sentiment ahead of potential US tariffs.

Going forward

Given the uncertainties posed by the US tariffs, Maybank’s Guha expects the operating trend for Q2 to be similar to Q1.

Sharing his view, OCBC said that in view of uncertainty over tariffs, it is important for investors to take into consideration the quality of the asset portfolio, geographical location of assets, track record and balance sheet strength of S-Reits.

However, analysts remained optimistic of the longer-term performance of S-Reits in view of falling interest rates. Chan expects S-Reits to register a year-on-year growth in their DPU in FY2026. Similarly, OCBC forecasts a recovery in DPU by 4.4 per cent on average in FY2027, assuming there is no global recession.

Among S-Reits, Natarajan thinks large-cap, high-quality Singapore-centric Reits could do well. He favours industrial, office, healthcare and suburban retail sub-sectors, while hospitality is the least preferred.

OCBC prefers S-Reits that can exhibit DPU growth and are backed by strong sponsors. Its top picks are CapitaLand Ascendas Reit, CapitaLand Integrated Commercial Trust, Keppel DC Reit and Parkway Life Reit.