- The S-REITs Index fell 1.6% in May, reversing the 3.2% gain recorded in April, as markets increasingly priced in the possibility of interest rate hikes. AIMS APAC REIT (AAREIT SP, non-rated) was the best performer, rising 4.6% following its strong FY26 results. Acrophyte Hospitality Trust (ARAUS SP, non-rated) was the worst performer, declining 20% after severe weather conditions and rising operating costs weighed on its 1Q26 performance. Overseas retail was the best-performing sub-sector during the month, gaining 0.3%, while overseas commercial was the weakest, falling 3.5%, as US-office REITs reacted negatively to the prospect of higher interest rates.
- The ECB and BOJ raised their policy rates by 25bps in June, while the Fed kept rates unchanged. However, the Fed's dot plot indicates the possibility of one rate hike in 2026. Despite this, we continue to expect lower or stable financing costs for 80% of the S-REITs, as benchmark interest rates remain lower YoY. Combined with rental growth of 1%-3% from contractual rental escalations and positive reversions, this should support average DPU growth of c.3% YoY for S-REITs under our coverage in FY26e.
- We maintain our OVERWEIGHT stance on S-REITs, although we remain selective given the current interest rate backdrop. Our preference is for REITs with robust balance sheets, defensive earnings profiles, and a greater proportion of fixed-rate borrowings. Within the sector, we continue to favour retail S-REITs, supported by healthy tenant sales and limited new supply, which should underpin mid- to high-single-digit rental reversions in 2026. Our top picks remain high-yielding REITs with resilient portfolios, namely Stoneweg Europe Stapled Trust (SERT SP, BUY, TP: €1.89), Elite UK REIT (ELITE SP, BUY, TP: £0.41), and United Hampshire US REIT (UHU SP, BUY, TP: US$0.69). We also favour Prime US REIT (PRIME SP, BUY, TP: US$0.32), which offers an attractive valuation of 0.3x P/NAV alongside strong cash flow visibility and DPU growth potential.
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