Brief Overview
The S-REITs Index declined 5.7% in September, following a 4% decline in August. IREIT Global was the best performer, rising 9.8% after signing a 25-year lease with BVG at its Berlin asset, which will increase occupancy from approximately 25% to approximately 75%. Manulife US REIT was the worst performer, declining 23.3% amid concerns over US interest rates. By sub-sector, Singapore commercial REITs held up best, declining 2.9%, while Singapore diversified REITs were the weakest, falling 6.2%.
Phillip Securities Research expects 3Q26 results and business updates to reflect resilient operating performance and positive rental reversions, alongside year-on-year interest cost savings as S-REITs refinance debt at lower rates, although rising interest rates could temper those savings. The firm maintains its FY26e DPU growth forecast of approximately 3% for S-REITs under its coverage.
Investment Positives
Resilient Operating Fundamentals and Positive Rental Reversions
We expect 3Q26 results to reflect broadly resilient operating fundamentals. Positive rental reversions and contributions from acquisitions and asset enhancement initiatives are supporting revenue and net property income growth. Retail S-REITs, in particular, benefit from near-full occupancy and limited new supply, which should underpin mid-single-digit rental reversions in FY26e and FY27e.
Interest Cost Savings from Refinancing
On the financing front, some S-REITs are refinancing debt taken on at peak rates in 2023–2024 at lower rates, generating meaningful interest cost savings. With 3M-SORA at approximately 1.25%, down from 3.7% in 2023 and 21 basis points lower year-on-year, S-REITs with a majority of SGD-denominated debt should continue to benefit from lower financing costs. Approximately 73% of sector debt is fixed or hedged on average, helping to cushion the impact of higher rates.
Attractive Valuations and Yield Spread
S-REITs are trading at a price-to-NAV of 0.86x, which is 1.5 standard deviations below the historical mean. The forward dividend yield of approximately 6.4% is 0.7 standard deviations above the mean. The dividend yield spread widened by 30 basis points month-on-month to 3.9% and is now trading at 0.2 standard deviations above its historical mean, suggesting attractive relative value.
New Coverage Initiation — Frasers Logistics and Commercial Trust
Phillip Securities Research initiates coverage on Frasers Logistics and Commercial Trust with a BUY rating and a DDM-based target price of S$1.01. The positive view is underpinned by FLCT’s healthy balance sheet and exposure to logistics and industrial properties, which account for 75.3% of portfolio value. These assets offer resilient organic growth, supported by positive rental reversions and built-in rental escalations. The sponsor’s more than S$5 billion ROFR pipeline provides opportunities for inorganic growth, while non-core divestments and the backfilling of commercial vacancies offer additional catalysts. FLCT offers a FY26e distribution yield of 6.8% and trades at 0.79x P/NAV, 1.4 standard deviations below its historical mean.
Supportive Retail Sub-Sector Indicators
August 2026 RSI (excluding motor vehicles) rose 1.6% year-on-year, extending the 1.3% growth recorded in July 2026. Most retail trade industries recorded year-on-year sales growth, with cosmetics, toiletries and medical goods rising 11.2% and computer and telecommunications equipment gaining 10.7%.
Top Picks with Defensive Attributes
Our top picks are high-yielding S-REITs with resilient portfolios. Stoneweg Europe Stapled Trust (BUY, TP: €1.89 (S$2.70)) stands out due to its proposed manager internalisation, which could unlock value, alongside data centre growth optionality. Elite UK REIT (BUY, TP: £0.41(S$0.70)) benefits from UK government-backed rental income and a 99% interest rate hedging ratio, providing strong insulation against rising rates.
Investment Challenges
Rising Interest Rates Pose a Near-Term Headwind
The principal risk facing S-REITs is the renewed headwind from rising interest rates. Sustained higher rates could weigh on yield attractiveness and delay a sector re-rating. Higher base rates in Australia, Japan, the US and Europe could also put upward pressure on interest costs for REITs with greater exposure to these currencies.
Weak Sector Sentiment
Sentiment is likely to remain weak amid interest rate uncertainty. While depressed valuations present potential for a sector-wide recovery, the lack of clarity on the interest rate outlook is expected to hold back a broader re-rating in the near term.
Sub-Sector Weakness
Watches and jewellery retail sales declined 2.7% year-on-year in August 2026, while food and alcohol sales fell 1.1%. Year-to-date 2026 visitor arrivals declined 2% year-on-year and remained 12% below pre-COVID levels, with September 2026 international visitor arrivals 16% below pre-COVID levels. August 2026 RevPAR, however, remained 25% above pre-COVID levels.
Outlook
The overall outlook for S-REITs remains mixed. Operating fundamentals are resilient, supported by positive rental reversions and interest cost savings from refinancing. However, rising interest rates present a meaningful headwind to sector sentiment and valuations. Greater clarity on the interest rate outlook would be needed to improve sentiment and support a sector re-rating.
Recommendation and Target Price
Phillip Securities Research downgrades S-REITs to NEUTRAL from OVERWEIGHT, citing rising interest rates as a near-term headwind to valuations and sector sentiment. The firm advocates a selective approach, favouring REITs with resilient portfolios, sustainable DPU growth, healthy balance sheets and high debt hedging ratios. The top picks are Stoneweg Europe Stapled Trust (BUY, target price: €1.89 (S$2.70)) and Elite UK REIT (BUY, target price: £0.41 (S$0.70)). In addition, Frasers Logistics and Commercial Trust is initiated with a BUY rating and a target price of S$1.01.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
Frequently Asked Questions
Q: Why has the S-REITs sector been downgraded to Neutral?
A: Phillip Securities Research has downgraded S-REITs to Neutral from Overweight because rising interest rates pose a near-term headwind to sector valuations and sentiment, despite resilient operating fundamentals.
Q: What is the expected DPU growth for S-REITs in FY26e?
A: Phillip Security Research maintains a FY26e DPU growth forecast of approximately 3% for S-REITs under coverage, excluding Prime US REIT.
Q: Which REITs are Phillip Securities Research's top picks?
A: The top picks are Stoneweg Europe Stapled Trust (BUY, target price: €1.89 (S$2.70)) and Elite UK REIT (BUY, target price: £0.41 (S$0.70)), both selected for their resilient portfolios, high yields and defensive characteristics.
Q: Why was Frasers Logistics and Commercial Trust initiated with a BUY rating?
A: FLCT's healthy balance sheet, exposure to logistics and industrial properties (75.3% of portfolio value), positive rental reversions, built-in rental escalations and a sponsor ROFR pipeline exceeding S$5 billion support the BUY rating and target price of S$1.01.
Q: How are S-REITs benefiting from refinancing?
A: Some S-REITs are refinancing debt taken on at peak rates in 2023–2024 at lower rates. With 3M-SORA at approximately 1.25%, down from 3.7% in 2023, S-REITs with SGD-denominated debt are generating interest cost savings.
Q: What is the current valuation of S-REITs relative to historical levels?
A: S-REITs are trading at a P/NAV of 0.86x, which is 1.5 standard deviations below the historical mean, while the forward dividend yield of approximately 6.4% is 0.7 standard deviations above the mean.
Q: What are the key risks for the sector?
A: Sustained higher interest rates could weigh on yield attractiveness and delay a sector re-rating. Higher base rates in Australia, Japan, the US and Europe could increase interest costs for REITs with exposure to these currencies.
Q: Which retail sub-sector trends are supporting S-REITs?
A: August 2026 RSI (excluding motor vehicles) rose 1.6% year-on-year. Near-full occupancy and limited new supply in the retail sub-sector should underpin mid-single-digit rental reversions in FY26e and FY27e.
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