SREITs back in vogue as rate hike fears wane

Current yields are attractive.

Investors once feared that SREITs would suffer once interest rates rise. But as rate hike fears subside and market volatility escalates, analysts argue that SREITs have once again emerged as worthy investments.

A report by DBS said that S-REITs' current yield spread of 4.8% as attractive as it is above the 10- and 5-year average of 3.8% and 4.1%.

“Thus, we still see upside to share prices in the immediate tem. Our preference is for S-REITs with outsized yields and opportunities to surprise on the upside through acquisitions or with portfolios that continue to withstand operational uncertainties,” said DBS.

DBS also said that S-REITs should consider paying a higher proportion of management fees in cash to maintain sustainability.

“A regular feature amongst S-REITs, the payment of management fees in the form of units has the benefit of aligning managers’ interests with unitholders. However, we do see potential issues going forward if S-REIT managers continue to maintain its current structure of paying a substantial portion of its fees in units,” DBS said. 

DBS noted that as most REITs are trading below their respective NAVs and have a modest DPU growth profile.

“The continued issuance of new units will have the unintended consequence of eroding NAV per unit and diluting future DPU,” said DBS.