So far this year, Singapore's real-estate investment trusts (S-REITs) have steadily advanced as predictions of higher interest rates went awry, but it isn't clear whether yield-chasers will stick with the shares.
It's a tug-of-war between macroeconomics and the fundamentals, with some of the fundamentals looking at tad rocky, market watchers say.
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"The sector's outperformance is unlikely to persist for the rest of 2014 as we foresee rising operational headwinds," Chong Kang Ho, an analyst at BNP Paribas, said in a recent note.
The FTSE ST Real Estate investment Trusts Index has tacked on around 8 percent so far this year, outpacing an around 5 percent gain in the benchmark Straits Times Index over the same period.
Among the fundamental concerns for S-REITs' business ahead, Chong cites slowing tourist arrival growth, especially from China. "A prolonged decline could hurt occupancies at hotels and also sales/ shopper traffic at the retail malls," he said.
He's also concerned about the city-state's labor shortage. "The labor crunch from the tighter foreign labor quota policy could continue to impact high-touch sectors such as hotels, retail malls (as retailers slow their expansion plans) and factory/business parks (as tenants face worker shortage)," he said. He also expects new rules on subletting industrial space may burden that segment of the REIT space.
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But while Chong lowered his forecasts for S-REITs' dividends slightly, he isn't expecting much of a correction in the shares as they still offer yields of around 6.5 percent, well above the 10-year Singapore government bonds' around 2.3 percent yield.
Others also expect macro-economic factors – particularly global interest rates – will weigh more heavily with investors than concerns about S-REITs' operational challenges.
"We are cognizant that there can be a mad rush for exits in yield instruments, if interest rates do spike suddenly," CIMB said in a Singapore strategy note this week. "But if one cannot see the signs for such a situation in the near future, one has no choice but to play the yield game of the market."
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Since the market now appears to believe that the tapering of the U.S. Federal Reserve's asset purchases won't necessarily lead to interest rate hikes, S-REITs' yield spreads of around 4.5 percentage points don't appear too aggressive, CIMB said, keeping an "overweight" call on the sector.
"Undemanding valuations, high yields, sticky rental rates, high occupancy rates, strong balance sheets and a lack of immediate refinancing needs are the positives," it said.
The bank's real concern is that the low interest rates will spur S-REITs into poorly thought out acquisitions. "The only defense is to steer clear of REITs with a history of doing so," it said.
CIMB isn't alone in expecting yield to keep driving interest in the sector. "Investors' appetite for yield products remains robust," Min Chow Sai, an analyst at Nomura, said in a note last week.
S-REITs are even seeing strong interest in their bond offerings, he noted, with CapitaCommercial Trust selling a seven-year note last week at 2.98 percent, a spread of 119 basis points over the Singapore government bond with the same tenure. The spread was 52 basis points tighter than a similar offering from Starhill Global REIT in February, he noted.
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To be sure, Min Chow has concerns, noting that the S-REITs that Nomura covers are trading in line with their average historical yields. "The potentially higher risk-free rate has yet to be priced," he said, adding that market sentiment toward yield products, including REITs, is complacent.
"Concerns over a potential spike at the long end of the yield curve in 2015 could return as we progress towards the end of 2014," Min Chow said.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1