SINGAPORE-LISTED real estate investment trusts (S-Reits) may have enjoyed a strong rally towards the end of 2023 as peaking interest rates lifted investor confidence, but analysts are expecting subdued performance from the sector for the period ended December.

Market watchers warned that interest costs are still likely to trend upwards and weigh on distributions in this results reporting season, and urged investors to keep an eye on S-Reits' balance sheets amid expectations of portfolio valuation declines.

"Overall sector performance is expected to be subdued in terms of distribution per unit (DPU) growth, given the continued drag from higher interest rates," said head of OCBC investment research Carmen Lee.

"For the S-Reits under coverage and reporting their second half financial year results for this earnings season, our forecasts are pointing to a year-on-year decline

in DPU by 3.4 per cent on average." Similarly, RHB analyst Vijay Natarajan said he expects the earnings performance for stocks under the brokerage's coverage to remain muted. He forecast average DPU

for the sectors to decline slightly year on year, mainly due to interest cost pressures outweighing top line growth.

"Our focus will continue to be on S-Reit's balance sheet - such as

gearing, interest cover and hedging positions - in the upcoming results."

Analysts who spoke to The Business Times mostly remained cautious on S-Reits with foreign assets,

given the uncertainty over their portfolio valuations.

Natarajan said he expects valuations for overseas assets to take a hit, and will be monitoring the impact on the overall portfolio for S-Reits with overseas exposure. "(However), we do believe that we are at the peak of the asset devaluation cycle, with the possibility of upward revisions in 2024," he added.

Veteran Reit investor and chairman of GCP Global Gabriel Yap believes S-Reit earnings would be "muted at best", with foreign Reits facing a "deadly combination" that include higher interest rates, foreign exchange costs, gearing, and uncertain capitalization rates.

S-Reits with predominantly foreign assets in China, the United States, the United Kingdom and certain parts of Europe would likely underperform, he added.

Maybank analyst Krishna Guha noted that devaluation of offshore assets continues even if transaction volumes are limited.

"It will be interesting to note if managers talk up any high-priced debt or hedges, which can benefit from potential interest rate cuts, or have used recent declines in funding cost to reprice debt or raise hedge ratios," he said.

Subsectors to watch

The reporting season kicks off on Monday (Jan 22), with Frasers Centrepoint Trust releasing its first quarter updates. The other Frasers

Property Reits, Frasers Logistics & Commercial Trust and Frasers Hospitality Trust, will release their updates on Jan 30 and Feb 1, respectively.

CapitaLand Ascott Trust and CDL Hospitality Trusts will report their full-year results on Jan 29 and Jan 30, respectively.

Natarajan said cyclical sectors such as office and hospitality could outperform this year in terms of share price performance as they benefit from the economic recovery and peaking of interest rates.

"These sectors are also trading at relatively attractive valuations compared to the sector average," he said. "Singapore valuations are likely to remain largely stable, with a slight upside anticipated for hospitality assets in particular."

Lee from OCBC, however, noted that hospitality counters - especially those with more significant Singapore exposure - could report DPU below market expectations.

She pointed to statistics from the Singapore Tourism Board, which showed 10 per cent year-on-year declines in hotel revenue per available room (RevPAR) in both October and November 2023.

On the other hand, Lee expects

industrial S-Reits to be more resilient. Such Reits would likely be more active in embarking on inorganic growth opportunities as rates trend down, she said.

Sabana Industrial Reit will report its full-year results on Jan 23; Mapletree Logistics Trust and Mapletree Industrial Trust will release their third-quarter results on Jan 24 and Jan 25, respectively. Capita- Land Ascendas Reit and ESR-Logos Reit will both report their full-year results a week later on Feb 1.

While Natarajan also expects earnings from the industrial sector to remain resilient, he said valuations are currently at a premium, which could see share price performance slightly below its peers.

Apart from industrial S-Reits, GCP Global's Yap said he would be paying close attention to counters in the retail and office sectors, which could outperform.

Mapletree Pan Asia Commercial Trust, OUE Commercial Reit and Starhill Global Reit are scheduled to release their results on Jan 29. Keppel Reit will report its full-year earnings on Jan 30, and Lendlease Global Commercial Reit will announce its first-half results on Feb 1.

Maybank's Guha noted that management guidance on retail rent reversion and office lease renewals "will be crucial".

OCBC's Lee expects operational trends to remain largely resilient, especially on the rental reversion front, with the exception of China. But she added that occupancy could come under pressure as some tenants struggle with higher rents.

As interest rates peak, market participants are more likely to focus on the impact of operational performance over balance sheets going forward.

RHB's Natarajan said: "We will be keeping a close eye on occupancy resilience and the rent growth impact from any potential economic slowdown and the easing of post- Covid spending boom."