S-Reits post strongest returns since 2019 with 22.9% gain: Morningstar

[SINGAPORE] Rate cuts and solid property fundamentals propelled Singapore real estate investment trusts (Reits) to their best showing since 2019, said Morningstar on Thursday (Dec 8).

While the 22.9 per cent return in 2025 on the Morningstar Singapore Reit Index trailed the broader Morningstar Asia Index, which returned 26.1 per cent, it was still the best since before the Covid-19 pandemic.

“Looking ahead, we believe the market expects robust Singapore office market performance, supported by limited office supply,” said Morningstar analyst Xavier Lee.

Lee noted that the Singapore 10-Year bond yields moved directly inverse to S-Reits’ returns, dropping from about 2.8 per cent at the start of January 2025 to a low of 1.8 per cent at the start of August and then ending December at 2.2 per cent.

“Within our coverage, diversified Reits such as CapitaLand Integrated Commercial Trust, Suntec Reit and Mapletree Pan Asia Commercial Trust delivered the strongest year-to-date performance in 2025,” he added.

In the nine months ended September 2025, S-Reits had an overall performance of 10.1 per cent, with office Reits outperforming at 15.3 per cent and hospitality Reits coming in weakest at 3.4 per cent.

Lee added that Keppel Reit’s dilutive equity raise in December to acquire a third of Marina Bay Financial Centre Tower 3 weighed on its gains for the year.

S-Reits are currently trading at a 17 per cent discount to book value, noted the report, with office Reits trading at the steepest discount to book value.

The 10 largest S-Reits on the Morningstar index are Mapletree Logistics Trust , CapitaLand Ascendas Reit , CapitaLand Integrated Commercial Trust , Keppel DC Reit , Mapletree Industrial Trust , Mapletree Commercial Trust , Frasers Logistics & Commercial Trust , Frasers Centrepoint Trust , Keppel Reit and Suntec Reit .

Real estate yields to stay stable

Real estate yields are expected to remain stable or “tighten slightly” in the near term as bond yields rebound “modestly” after bottoming in September 2025. Transaction activity is also set to rise in 2026, thanks to lower interest rates.

Lee added that significant asset devaluation in the year-end revaluation exercise is not expected, even though valuation cap rates for some Reits “are lower than the prime yields” as reported by real estate services company CBRE.

“Our view is underpinned by high occupancy rates and strong rental reversions across the Reits we cover,” he said. “The robust operating performance of the underlying assets is expected to offset any downward pressure on valuations arising from capitalisation rate expansion.”

A capitalisation rate shows a property’s potential return on investment by dividing its net operating income by its current market value or price.

Fundamentals resilient across key sectors

In the office sector, Morningstar described the current leasing weakness as “transitory”, noting that interest from banking and finance firms remains strong even though tenants prioritised renewals over new leases in the third quarter of 2025.

Lee forecast the office vacancy rate to tighten “sharply” from the current 5.1 per cent to 2.4 per cent by 2027 as the market absorbs new supply from projects such as IOI Central Boulevard and Keppel South Central.

“The resulting reduction in vacancy will set the stage for a strong acceleration in rental growth, significantly benefiting central business district office landlords,” Lee said.

The retail sector has a similarly positive outlook, with prime rents in both Orchard and suburban malls strengthening on the back of tight vacancy rates.

While visitor arrivals still lag pre-pandemic levels, Morningstar noted that average tourist spending has surpassed 2019 figures. This growth is being driven by a structural shift in tourist behaviour towards “experiences” and luxury goods, which was notably boosted by the F1 race in October.

Still, trends in the industrial sector were more mixed.

Leasing activity moderated in the third quarter of 2025 as occupiers became cautious regarding potential US tariffs. However, the sector continued to find support from the electronics industry, which is doing well due to strong demand for artificial intelligence (AI)-related servers.

For business parks specifically, Lee said vacancies have likely already peaked and will improve gradually as new supply remains limited beyond 2025.

Keppel Reit and Mapletree Industrial Trust were flagged as top picks as they trade at “attractive” distribution yields of 5.5 per cent and 6.4 per cent, respectively.

“We expect Keppel Reit to benefit from the tightening Singapore office market,” said Lee, while pointing out that Mapletree Industrial Trust is “well-positioned” to benefit from structural AI-driven demand.

Regional Reits set for “selective resilience”

Looking beyond Singapore, DBS Group Research on Tuesday (Dec 6) highlighted that the broader Asia-Pacific Reit market is poised for “selective resilience” as policymakers remain data-dependent.

With the market pricing in up to two additional rate cuts in 2026, DBS noted that S-Reits specifically are entering a “two-year rate-cut led earnings upcycle”.

While S-Reits and Australian Reits posted steady gains of 0.7 per cent and 0.9 per cent, respectively, in December, Thai Reits (TH-Reits) jumped 4.4 per cent month on month, drawing defensive inflows.

“TH-Reits, now in favour amid political uncertainty, are likely to remain on investors’ radar as markets expect additional rate cuts in the first quarter of 2026,” said DBS.

Conversely, Chinese Reits underperformed with a 2.9 per cent decline due to regulatory scrutiny, though DBS sees potential catalysts ahead in the form of escalated asset injections and new market entrants.

DBS indicated a preference for office and industrial Reits in Singapore, a preference for retail Reits in Hong Kong and China and a preference for industrial and hotel Reits in Thailand.