S-REITs: Selectivity remains key as 1H26 earnings confirm an uneven recovery

• 1H26 results were broadly resilient at the operating level. Rental reversions stayed positive across several segments and lower borrowing costs are starting to flow through to distributable income, but escalation of the Middle East conflict since March has curbed expectations for further rate cuts and introduces upside risk to financing costs into 2H26.
• Data centres and Singapore-focused office and retail REITs led on DPU growth in 1H26, while overseas commercial REITs generally lagged, weighed down by vacancies, FX translation on foreign-sourced income and softer overseas office conditions.
• We favour industrial, Grade A CBD office and data centre REITs. Balance sheet quality, namely low gearing (below 40%) and high interest coverage (above 2.5 times), remains the starting filter for which REITs can sustain or grow distributions.
• The FTSE ST REIT Index now trades at approximately 0.92x forward price-to-book (10Y average: 0.98x), while the 10-year SGS yield has risen to 2.30%. The yield spread has narrowed to 3.63%, below its 10-year average of 3.70%, a further erosion of the valuation cushion despite the sector's underperformance.
• We maintain our 2028 target price of SGD 0.83 for the Lion-Phillip S-REIT ETF (SGX: CLR), implying little to no upside from its closing price of SGD 0.81 as of 17 August 2026, alongside an annual dividend yield of 5.8%.

Singapore REITs (S-REITs) have continued to face selling pressure as inflationary pressures triggered by the Middle East conflict persist. On a year-to-date basis, the FTSE ST REIT Index delivered a total return of negative 2.7%, lagging the STI, which delivered a positive 28.3% total return over the same period.

Figure 1: The S-REITs sector has underperformed the STI on a year-to-date basis

The sector now trades at around 0.92x forward price-to-book, a discount to its 10-year historical average of 0.98x. For income-focused investors, this naturally raises the question of whether the sell-off has created an opportunity, or whether more pain lies ahead.

Figure 2: Forward Price to Book Ratio continues to be at a discount to its 10-year historical average of 0.98x

Our house view remains that interest rates will stay higher for longer, and we believe this has important implications for how investors should approach the sector. While we do not advocate avoiding S-REITs altogether, we maintain that a selective approach, rather than broad-based exposure, is the more prudent strategy at this juncture.

Related article: S-REITs: Rate cycle turns, sector faces renewed pressure

Related article: S-REITs: Selectivity remains key in a higher-for-longer rate environment

Valuations have not fully priced in higher-for-longer rates

On the surface, a forward price-to-book ratio of 0.92x, below the sector's long-term average, may appear to represent an attractive entry point. However, we caution against reading too much into this apparent discount.

Our base case is that rate cuts remain off the table given persistent inflationary pressures. Should Singapore Government Securities (SGS) yields continue to rise, this raises the risk of a round of book value write-downs driven by cap rate expansion. In this scenario, reported price-to-book ratios could move back above the historical average of 0.98x even without further share price declines, simply because book values themselves would be revised lower.

This would effectively erode the valuation cushion that currently appears to support the sector. For this reason, we do not view the broad S-REIT sector as offering an attractive entry point at current levels. Investors should resist the temptation to view the recent underperformance purely through the lens of valuation support and instead focus on the quality and resilience of individual names.

Near-term recovery catalysts remain limited

We see limited scope for a near-term, sector-wide recovery in S-REITs, and believe the bar for a genuine re-rating is higher than many investors may appreciate. A key reason for this is the lingering impact of recent global oil supply disruptions.

Even if geopolitical tensions in the Middle East were to ease immediately, the inflationary pressures underpinning our higher-for-longer rate view would not dissipate quickly. Global oil reserves, including commercial, in-transit, and strategic stockpiles, have been heavily drawn down, and clearing existing shipping backlogs alone could take months.

Beyond this, major oil-consuming nations are likely to aggressively rebuild depleted strategic reserves, which would sustain elevated demand and keep oil prices higher for an extended period, with some estimates suggesting supply deficits could persist well into 2027. The International Energy Agency (IEA) has highlighted that global buffer levels have fallen to unprecedented lows, leaving markets highly sensitive to any further shocks.

For S-REITs specifically, a durable recovery would require more than a de-escalation headline. It would require concrete, sustained evidence that inflationary pressures are easing, giving central banks genuine room to begin cutting rates.

On the domestic front, a meaningful and sustained compression in SGS yields would help restore the yield spread that makes S-REITs attractive relative to risk-free alternatives, but this too is contingent on the broader global rate trajectory shifting in a more dovish direction. As of 17 August 2026, the 10-year SGS yield stood at 2.30%, above the pre-war level of 1.95%. The yield spread between S-REITs and 10-year SGS bonds has narrowed from pre-war 3.81% to 3.63% (as of 17 August 2026).

This came below the sector's 10-year average of 3.70%, meaning investors are being compensated less for holding S-REITs over risk-free SGS bonds than they have been historically, a further reason we do not view current levels as an attractive entry point.

Figure 3: Yield spread has narrowed slightly below 10-year average of 3.70%

1H26 earnings: resilient but uneven

Half-year results for the period ended 30 June 2026 were broadly resilient on the operating level. Data centres and Singapore-focused office and retail assets led on DPU growth, industrials told a mixed story on DPU specifically even as the underlying businesses stayed healthy, and hospitality names diverged depending on whether growth reflected genuine operational improvement or base effects.

Keppel DC REIT's net property income rose 15.1% year-on-year (YoY), driven by rental reversions of around 10% in 1H26, contract escalations, and the Tokyo Data Centre 3 and Keppel DC Singapore 3 and 4 acquisitions, continuing to benefit from structural demand tied to cloud computing and AI infrastructure buildout. As a result, its DPU grew by 11.3% YoY to 5.714 cents.

Suntec REIT's Singapore office and retail assets carried nearly all of its DPU growth which expanded 24.8% YoY to 3.936 cents, with occupancy at 99.5% (both its Singapore office and retail portfolio) and 10.1% rental reversions in the office portfolio alongside 10.7% in the retail portfolio. CapitaLand Integrated Commercial Trust delivered 7.1% DPU growth to 6.02 cents, even after absorbing dilution from its April placement, supported by the Paragon acquisition ramping up.

On industrials, Alpha Integrated REIT posted 19.4% DPU growth to 2.03 cents on occupancy improving to 95% from 85.7% and rental reversions of 10.9% in 1H26, alongside deleveraging, with aggregate leverage down to 34.9% (1Q26: 36.1%) and interest coverage improving to 4.2 times (1Q26: 3.6 times). CapitaLand Ascendas REIT grew distributable income by a healthy 8.6%, but DPU came in essentially flat at 7.482 cents (+0.1% YoY), exactly as our June update anticipated, because the growth was funded through equity raises for roughly SGD 1.8 billion of acquisitions across the US, Europe, Singapore, and Japan, including a stake in Osaka Data Centre 1. We continue to frame CLAR as a REIT building forward earnings power now, with the DPU benefit more likely to come through in FY2027 and beyond.

Hospitality showed a mixed picture rather than broad-based growth. CDL Hospitality Trusts' 8.6% DPS growth reflects genuine operational improvement, with Singapore RevPAR up 4.1% and occupancy up 3.5 percentage points. On the other hand, OUE REIT's 28.6% growth is driven by a 12.3% rise in hospitality NPI, the Salesforce Tower acquisition, and lower finance costs. Far East Hospitality Trust's DPS fell 8.4%, mainly because the prior-year period included a one-off gain from the Central Square divestment; distributable income actually rose 8.9% on lower finance expenses. Excluding the prior-year one-off gain, DPS actually rose 7.9% YoY.

Overseas commercial REITs generally lagged, weighed down by vacancies, FX translation, and softer conditions in some overseas office markets.

The key differentiator across the board remains balance sheet flexibility and financing cost trajectory. REITs able to refinance into lower rates or cut finance costs through capital recycling saw that flow straight through to DPU, while REITs still carrying legacy higher-cost debt saw less of the benefit. Notably, Prime US REIT topped the DPU growth table at 316.7%, but this reflects a payout ratio held down at 10% through 2023 to mid-2025 normalising to 65%, not organic growth, and should be read alongside its still-elevated leverage and weak interest coverage rather than as a turnaround signal.

Table 1: Top 10 S-REITs by 1H26 year-on-year DPU growth

Rank	REIT	1H2026 DPU/DPS	YoY Growth	Key Driver
1	Prime US REIT	0.50 US cents	+316.7%	Payout ratio normalisation off a suppressed prior-year base, not organic growth
2	OUE REIT	1.26 cents	+28.6%	Hospitality NPI +12.3%, Salesforce Tower acquisition, 16.6% cut in finance costs
3	Suntec REIT	3.936 cents	+24.8%	Singapore office and retail strength, lower financing costs
4	Alpha Integrated REIT	2.03 cents	+19.4%	Occupancy up to 95% (1Q26: 85.7%), deleveraging, aggregate leverage down to 34.9%
5	ParkwayLife REIT	8.77 cents	+14.6%	Singapore hospital rent review formula
6	Keppel DC REIT	5.714 cents	+11.3%	Rental reversions (~10%), escalations, Tokyo DC3 and Keppel DC S3/4 acquisitions
7	Sasseur REIT	3.366 cents	+10.0%	Outlet mall rental income growth
8	CDL Hospitality Trusts	2.15 cents	+8.6%	Improved operating performance, lower interest expense
9	Far East Hospitality Trust	1.63 cents	+7.9%	Singapore hospitality demand; note DPS actually fell 8.4% on a high base from a prior-year one-off gain, underlying DI +8.9%
10	CapitaLand Integrated Commercial Trust	6.02 cents	+7.1%	Paragon acquisition ramping up, absorbed April placement dilution
All figures are for the six-month period ended 30 June 2026, as reported by each REIT's manager and sourced from company results announcements and financial media. DPU and DPS growth rates are as reported and may include contributions from acquisitions, divestments, capital distributions, or one-off items alongside organic operating performance, so figures are not always directly comparable on a like-for-like basis; this list reflects the strongest reported DPU or DPS growth identified across the S-REIT sector for the period and should not be read as an exhaustive ranking of the full universe. Data retrieved on 14 August 2026.

Where we see relative resilience: Industrials, Grade A CBD Office and Data Centres

Within the S-REIT universe, we favour the industrial and Grade A Central Business District (CBD) office and data centre sectors, all of which benefit from structural demand drivers that are, to a meaningful degree, independent of the interest rate cycle.

JTC's data for 2Q26 supports this view. Overall industrial occupancy rose to 89.1%, up 0.2 percentage points quarter-on-quarter (QoQ) and 0.3 percentage points YoY, led by the business park and multiple-user factory segments. The industrial rental index rose 0.5% QoQ and 2.1% YoY, while the price index rose 0.6% QoQ and 3.8% YoY. Single-user factory rents led segment growth at 0.7% QoQ and 3.1% YoY. As demand continues to be driven by structural shifts in supply chain and technology requirements rather than the broader macroeconomic cycle, we believe industrial REITs remain better positioned to weather a higher-for-longer rate environment.

Similarly, for Grade A CBD offices, Singapore's core CBD vacancy rate continued to be at a record low of 3.3% in 2Q26, with no significant new supply expected until 2028. This persistent scarcity of quality office space supports landlord pricing power regardless of where we are in the interest rate cycle, providing a degree of insulation that we believe is increasingly valuable in the current environment. Core CBD (Grade A) rents have also edged up 0.8% QoQ to SGD 12.50 per square foot.

Data centres represent a third structural pillar. JLL's 2026 Global Data Center Outlook projects nearly 100 GW of new capacity to be added globally between 2026 and 2030, doubling global capacity at a 14% CAGR through 2030, while Cushman & Wakefield's 1H26 Asia Pacific Data Centre notes the region held onto strong growth momentum in 1H26 on the back of AI workloads, cloud services, and enterprise digital transformation. This buildout is structural and largely distinct from the office and industrial cycle, underpinning Keppel DC REIT's 1H26 performance and supporting our data centre exposure alongside industrials and Grade A CBD office.

Identifying REITs best positioned to sustain distributions

Beyond sub-sector exposure, balance sheet quality remains, in our view, an important factor in determining which S-REITs can sustain or grow distributions in a higher-for-longer rate environment. We continue to screen for low gearing (below 40%) and high interest coverage ratios (above 2.5 times).

CapitaLand Integrated Commercial Trust's (Leverage: 37.4%, ICR: 3.9x) 1H26 results reinforce its position as a preferred name, with 7.1% DPU growth to 6.02 cents even after absorbing dilution from its April placement. CapitaLand Ascendas REIT's (Leverage: 39.7%, ICR: 3.5x) 1H26 results confirm our June assessment: distributable income grew a healthy 8.6%, but DPU was essentially flat at 7.482 cents on the equity fundraising, with the deleveraging pathway and DPU benefit still expected to come through from FY2027 onward. We continue to recommend CLAR on its underlying portfolio fundamentals and clear deleveraging trajectory (Leverage fell from 42.0% in 1Q26 to 39.7% in 2Q26).

Mapletree Industrial Trust (Leverage: 37.5%, ICR: 4.0x) posted a weaker 1QFY26/27 (quarter ended 30 June 2026): NPI fell 8.5% YoY and DPU fell 4.9% YoY to 3.11 cents, mainly on the absence of income from the August 2025 Singapore divestment and non-renewed North America leases, partially offset by positive rental reversions in Singapore (+5.3%) and North America (+2.2%). Leverage rose from 34.0% to 37.5% on debt drawn to redeem maturing perpetual securities.

Within North America (NA), performance is uneven even inside the data centre portfolio: Hawthorne and Sunnyvale secured new long-term leases with escalations, while three data centres sit vacant on non-renewed enterprise tenancies: San Diego (valuation cut by around two-thirds), and Arlington and Pewaukee (together about 0.5% of the portfolio). A fourth, Philadelphia, was already divested in June 2026 at a 4.3% premium to valuation. We view the vacancies as a tenant-concentration issue rather than a data centre demand problem.

We keep MINT on watch rather than a preferred stock in the S-REIT sector: management itself flags continued near-term NA pressure (confirmed non-renewals of leases within the North American Portfolio in FY26/27) and higher borrowing cost from the repricing of maturing interest rate swaps, which were previously locked in at lower rates. However, Philadelphia's above-valuation exit supports the case that this is a portfolio in transition rather than one in structural decline. We would look to restore MINT as a preferred stock once San Diego's fate is resolved, the SGD 500-600 million NA divestment programme executes further, and leverage resumes its downward trend.

Looking at pure-play data centre names, Keppel DC REIT's (Leverage: 34.0%, ICR: 6.9x) 1H26 results support adding it for data centre exposure: DPU grew 11.3% to 5.714 cents on rental reversions, escalations, and the Tokyo Data Centre 3 and Keppel DC Singapore 3 and 4 acquisitions, with aggregate leverage at 34.0%, retaining meaningful debt headroom for further acquisitions.

Within the smaller names, we spotlight Digital Core REIT (Leverage: 39.2%, ICR: 3.2x) and Stoneweg Europe Stapled Trust (SERT) (Leverage: 43.6%, ICR: 3.0x). We like Digital Core REIT as a data centre satellite allocation, underpinned by strong structural demand for AI-driven data centre capacity. Digital Core REIT's 1H26 DPU held stable despite lower net property income, as higher distributions from associates and unit buybacks offset the impact; in-service portfolio occupancy remained high at 97.3% (1Q26: 97.1%) and the REIT achieved cash rental reversions of 25% on new and renewal leases.

Related article: Digital Core REIT 1H26: Stable DPU and 7.3% yield offer a cushion while growth catalysts await

Related article: Stoneweg Europe Stapled Trust: Resilient income, data centre gains momentum

Conversely, we would highlight that REITs with leverage above 40% and interest coverage ratios below 2.5 times face meaningful distribution risk in this environment, as rising refinancing costs would likely erode distributable income over time, absent the mitigating factors discussed above. Examples of such S-REITs include Prime US REIT (Leverage: 44.9%, ICR: 1.6x) and Keppel Pacific Oak REIT (Leverage: 43.3%, ICR: 2.5x). Investors should pay close attention to these metrics when assessing individual S-REITs, rather than relying on headline yield alone.

While SERT's leverage of 43.6% sits above our 40% threshold, we highlight that SERT is a Stapled Trust (REIT and Business Trust); hence, it is not subject to MAS’s regulatory limitations. More importantly, the quality of SERT's debt profile provides significant downside protection. 90% of interest exposure is hedged or fixed through late 2027 following an extension of its EUR 160 million interest rate hedge. Its weighted-average debt maturity exceeds five years, and there is no refinancing requirement until 2030 (excluding the evergreen RCF maturing late 2028).

We therefore remain comfortable with SERT's current capital structure and continue to like the trust for its resilient income profile, supported by structural logistics rental growth (+9.6% reversion in 1H26) and exposure to data centres in the development stage via the AiOnX data centre development fund, offering meaningful NAV upside optionality. The AiOnX is also accretive to distributions and has contributed about 5.6% of its 1H26 DPU.

Conclusion

1H26 results came in broadly resilient at the operating level across the sector. However, we do not see compelling near-term catalysts for a broad-based recovery, particularly with the Middle East conflict's escalation since March curbing rate-cut expectations further and would caution against viewing current valuations as an attractive entry point for the sector as a whole.

In terms of valuations, we maintain our 2028 target price of SGD 0.83 for the Lion-Phillip S-REIT ETF (SGX: CLR), which presents little to no upside as of the closing price on 17 August 2026 of SGD 0.81, alongside an annual dividend yield of 5.8%.

We continue to favour S-REITs with stronger interest coverage ratios, lower gearing (or a credible path back to it), and exposure to sub-sectors with structural demand for their underlying assets, namely industrial, Grade A CBD office and data centres.

Within this context, CapitaLand Integrated Commercial Trust (SGX: C38U), CapitaLand Ascendas REIT (SGX: A17U) and Keppel DC REIT (SGX: AJBU) stand out as names that combine balance sheet resilience with favourable underlying fundamentals. Within smaller names, we highlight Digital Core REIT (SGX: DCRU) and Stoneweg Europe Stapled Trust (SGX: SEB), supported by structural AI and cloud-driven demand and attractive valuations.

Disclaimer: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report, including all investment theses, ratings, price targets and conclusions, has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.