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.
Yields in the sector have already compressed, with the average 2015 yield at 5.9 percent, or 3.5 percentage points over the 10-year Singapore government bond yield, below the average spread of 3.71 percentage points, Kum estimated. Singapore's 10-year bond yield is trading around 2.41 percent, jumping from around 1.8 percent in mid-January.
Kum doesn't see much room for capital gains either, noting that with rising asset prices, acquisition options are "challenged" and there are fewer opportunities for major asset enhancements.
However, it's not a doomsday scenario, as Kum expects capital flight form the sector to create a buying opportunity.
Others are somewhat more bearish on the sector's outlook.
"Any talk of interest rate hikes could spook the S-REITs sector, resulting in a more volatile outlook for 2015," CIMB said in a note last week.
CIMB estimates that every 25-basis-point rise in Singapore's 10-year bond yield would shave sector share prices by around 2.9-5 percent, while a 25-basis-point increase in the capitalization rate – or a property's rate of return based on the ratio of net operating income to property asset value – would send share prices down by 3.4-5.9 percent. A rising capitalization rate would imply falling asset values, CIMB noted.
But CIMB also doesn't see doom for the sector, with its Underweight call driven by expectations sector share prices it will be rangebound.
DBS also expects S-REIT share prices won't rise much from here as the days of cheap financing are likely reaching their end. Refinancing costs will increase as S-REITs roll over their debt starting this year, said in a note Tuesday. It expects distributions could fall as much as 5.6 percent over this year and next.
While many S-REITs have the ability to pursue growth – and potential share-price appreciation – via acquisitions, DBS has concerns about that approach. "We are cautious of rising gearing levels at the start of an interest rate upcycle," it said.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter