Investors searching for yield should buy this sector in Singapore, strategists say

Key Points
  • The share prices of Singapore-listed real estate investment trusts, or S-REITs, have gone up by close to 20% this year.
  • Strategists from Credit Suisse and DBS say S-REITs may not appreciate much more in price, but they're still a buy for its roughly 5% yield.
  • But OCBC said it has removed several S-REITs off its "buy" list because they're "near or close to our full valuations."
Everett Rosenfeld | CNBC

Singapore-listed real estate investment trusts may not appreciate much more in price given their roughly 20% rise this year — but strategists said they're still a buy as interest rates will likely stay low.

Real estate investment trusts, or REITs, are companies that manage a portfolio of properties such as shopping malls, hotels and offices. Income generated from those real estate assets, after accounting for operating fees, is distributed as dividends to shareholders.

Investors generally find REITs attractive for their dividend payout and the potential for capital appreciation, and as a diversification in a portfolio of stocks, bonds and cash.

REITs listed on the Singapore Exchange — commonly known as S-REITs — have been a favorite among institutional investors. In the first six months of 2019, S-REITs attracted a net inflow of 396.3 million Singapore dollars ($291.85 million) from institutional investors, the exchange said in a report.

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Such interest from investors sent the prices of S-REITs up by close to 20% this year — beating Singapore's stock benchmark Straits Times Index's 9% rise, and roughly in line with gains seen in the broader MSCI World REITs Index.

"At this level, there's very little chance of capital appreciation," Suresh Tantia, a senior investment strategist at Credit Suisse, said on Thursday at a briefing of the bank's investment outlook.

But for investors focused on income, the S-REIT sector "still offers you 5% yield especially when bond yields are not going to go up substantially from here," he added.

The potential for bond yields to inch higher have mostly diminished as major central banks globally are expected to cut interest rates. The expectations for lower interest rates have encouraged investors to buy previously issued bonds with higher yield, which drove up prices.

REITs close to 'full valuations' 

Not everyone agrees that investors should continue piling into the S-REITs now that their share prices have gone up. Singaporean bank OCBC, for one, said on Thursday it has removed several S-REITs off its "buy" list because they're "near or close to our full valuations."

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Yields offered by S-REITs have come down from around 6% earlier this year to the current 5%, strategists said. But that's still better than the near-zero or negative yielding options in the bond market, said Hou Wey Fook, chief investment officer of Singaporean bank DBS.

"Given that interest rates everywhere are racing towards zero, 5% is a very attractive yield. We therefore think Singapore REITs remain a hold, a buy," Hou told CNBC's "Street Signs" this month. He added that there aren't many REIT markets in the world that offer yields of 5% and higher.

DBS has maintained a "buy" recommendation on several S-REITs including Ascendas REIT, CapitaLand Retail China Trust and Frasers Centrepoint Trust.