• Stay OVERWEIGHT; Top Picks: CapitaLand Ascendas REIT (CLAR), CapitaLand Integrated Commercial Trust (CICT), Keppel REIT, and AIMS APAC REIT. We remain cautiously optimistic that 2025 will be a year of recovery for S-REITs after three years of underperformance, albeit with bouts of volatility from Donald Trump's tariff policies. S-REIT index is currently trading at only about 7% above 2020's COVID-19 lows and 33% below recent peaks, indicating downside risks are mostly priced in.
• Key factors driving recovery will be the continued gradual reduction in US Federal Funds Rate (FFR) with RHB economists forecasting three cuts in 2025 (vs market expectations of 1-2), easing long-term risk-free rates over the course of the year. We also expect Singapore's GDP growth to be at 3.0% for 2025, at the top end of official range. This Goldilocks scenario is positive for S-REITs and will drive DPU turnaround in FY25, augmented by an anticipated shift in fund flows towards REITs from other high yield instruments, ie T-bills and fixed deposits. Valuation-wise, S-REITs are attractive, trading at 0.85x PB, at -1SD levels of long-term average yield and offering average yield of 6.2% with a yield spread of 335bps over 10-year government bond yield - among the highest globally (Figure 30).
• We expect S-REITs to remain active in capital reallocation strategies via divestments of non-core assets and recycling it into acquisition of higher yielding and better-quality assets and asset enhancements to extract value. 2024 was a record year for divestments (Figure 8) with SGD3.3bn of assets recycled while the acquisition pace doubled vs 2023, with many large cap S-REITs adding high quality and largely Singapore assets to their portfolio. With many S-REITs trading at deep discounts and asset values stabilising, this could also prompt return mergers and acquisitions (M&A), privatisation, and takeover activities among S-REITs. Possible M&A and takeover candidates include Paragon REIT, Suntec REIT and Frasers Hospitality Trust.
• Prefer industrial and office S-REITs. We recommend investors to gradually increase allocations to S-REITs as we expect some volatility and pullbacks over the course of the year from policy uncertainties. Industrial S-REITs still have the most defensive characteristics, with favourable demand and supply dynamics and stable cash flow. Office S-REITs remain the most attractive in terms of valuation amid undue investor concerns over the sector. We remain selective on retail REITs amid softening signs in retail sales and valuation grounds, and are neutral on the hospitality sector as it is past its peak. Overseas S-REITs are trading at deep discounts and could fit investors with a slightly higher risk appetite and aiming for higher capital appreciation.
• Key risk is sharp resurgence of global inflationary pressures from tariff policies resulting in higher-for-longer interest rates, stagflation, and potential economic recession.

Source: RHB Research - 10 Jan 2025