Singapore's real-estate investment trusts (REITs) have long defied predictions they would stumble amid expectations for rising interest rates, but analysts say the day of reckoning may soon arrive.
"Although S-REITs are financially well-positioned to weather a moderate increase in interest rates, we see investment interest in the REIT sector cooling further in the run up to the first Fed rate hike," Kum Soek Ching, head of Southeast Asia research for Credit Suisse private banking and wealth management, said in a note Tuesday.
REITs are trusts which own income-generating properties and then pay out most of their earnings as dividends, making them popular among yield-hungry investors, who often treat them like a type of bond.
The S-REIT index, the FTSE ST REITs index, has risen around 2 percent over the past three months, outperforming the Straits Times Index's around 0.2 percent rise year-to-date.
Singapore's market has become a comfortable home for sector listings; there were 33 listed REITs with a total market capitalization of more than 61 billion Singapore dollars (around $44 billion) as of the end of September last year, according to data from the Monetary Authority of Singapore. REITs make up around 19 percent of Singapore's underlying institutional-grade real-estate market, the highest percentage in Asia, according to June 2014 data from the Asia-Pacific Real Estate Association.
But it's not that she expects earnings or debt loads will take much of a hit, estimating that every 25-basis-point rise in short-term interest rates will hit dividend per unit (DPU) by less than 2 percent this year and next.
"We see a modest DPU impact from more costly debt refinancing, but a bigger sentiment overhang on the sector, especially given unsupportive valuations," she said.