Office S-REITs

Some Office S-REITs Struggling

SINGAPORE – Market watchers now hold a less than favourable view on Singapore-listed real estate investment trusts (S-REITs) that own office properties, reported The Business Times on Monday morning (22 May, SGT).

This is because most office S-REITs and business trusts that recently published an update on their distributable income in Q1 2023 recorded drops in this figure.

In particular, Prime US REIT, Keppel Pacific Oak US REIT, and Elite Commercial Trust registered a sharp fall in distributable income of more than 20 percent amidst higher financing costs. Notably, the first two own office buildings in the United States, while the third entity holds commercial properties in the United Kingdom.

“We remain cautious on the office sector as the high interest rate environment weighs in on its capital structure and balance sheets,” said DBS Group Research analysts Dale Lai, Derek Tan, Rachel Tan, and Geraldine Wong in a recently published note.

“With a more cautious economic environment, we believe that investors should be looking to position in sectors that can deliver earnings resilience in a low growth environment.”

Similarly, CGS-CIMB analysts Natalie Ong and Lock Mun Yee said their preferred S-REITs are those in the “industrial, retail, hospitality, and office sub-sectors, in this order”. Nonetheless, they are overweight on REITs as a whole.

“We prefer S-REITs that we believe can deliver organic growth in excess of rising funding cost, leading to DPU and yield improvement.”

“While rates may stay high in the near term, an end to the rate hike cycle should allay refinancing and asset value concerns, thus leading to a positive knock-on impact on S-REITs cost of capital and spur inorganic growth prospects going forward,” added the CGS-CIMB analysts.

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