S-REITs underperforming due to interest rates, inflation: CGS-CIMB

The FSTREI declined 16% year-to-date.

Rising interest rates and inflation headwinds downgraded Singapore Real Estate Investment Trusts’ (S-REITs) performance on the stock market, CGS-CIMB.

Share prices of S-REITs were the worst in October 2022, after declining 15% year-to-date. It experienced impacts from strong rate hikes on stubbornly high inflation outlook.

“With the sharp surge in interest rates, there was a faster than expected rise in interest costs of 20-50bp qoq in 3Q22,” said CGS-CIMB.

It is seen that the rate upcycle is closer to an end and cost pressures are easing, which may affect S-REITs performance in the medium term.

“The recovery in SREITs is expected to be uneven, with those with strong balance sheets and low gearing likely to emerge from the environment faster,” CGS-CIMB said. 

The top picks for the S-REIT sector are CICT and CLAR. 

The risks include a longer and higher than projected rate hike environment, which could mean further earnings downward revisions.

Potential benefit for this sector is a faster than expected decline in interest rate environment, which could lower SREITs' cost of capital and moderate funding costs.