More pain to come for Singapore REITs?

The Centrepoint mall on the Orchard Road shopping strip managed by Singapore-based REIT Frasers Centrepoint Trust.
Munshi Ahmed | Bloomberg | Getty Images
The Centrepoint mall on the Orchard Road shopping strip managed by Singapore-based REIT Frasers Centrepoint Trust.

Singapore's REITs, already taking a hit from rising interest rates and tapering expectations, may have further room to fall, possibly even crimping the city-state's initial public offering (IPO) pipeline, analysts say.

As persistent low rates and easy money from quantitative easing spurred investors to chase anything paying a yield, Singapore's REITs' payouts of sometimes more than 7 percent were popular, especially when coupled with the prospect that appreciation of the local currency could add a fillip to returns.

The FTSE ST REIT index tacked on more than 55 percent from the beginning of 2012 through its peak in mid-May and REITs have made up the lion's share of the city-state's IPOs this year.

(Read more: Taper terror may leave Singapore property unscathed)

But while the index is now off around 22 percent from its peak, hit by rising interest rates as the Federal Reserve prepares to turn off the easy money tap, the pain might not be over yet, analysts say. Singapore's STI is down around 5.6 percent so far in August, while the REIT index is off by around 7 percent.

"As the magnitude and speed of tapering remain unclear, S-REIT weakness in general could persist," Citigroup said in a note. Because higher rates will boost interest expenses and spur traders to unwind carry trades, "S-REITs are unlikely to be a beneficiary of any tapering-induced 'flight to safety' into the Singapore 'safe haven.'"

(Read more: Are Singapore home prices about to ease, finally?)

Even though the sell-off has left S-REITs fairly valued and their yield spreads over Singapore government bonds within average ranges, it's not the time to buy, analysts say.

"It's not where rates are at, but rather, when will they stabilize and at what levels," Donald Chua, an analyst at CIMB, said in a note. He said shares could fall 12 percent from current levels if the 10-year Singapore government bond's yield rises to its 10-year high of 3.60 percent, still about 90 basis points away.

REITs hamper IPO pipeline

S-REITs' loss of popularity may dent the Singapore Exchange's (SGX) hopes for attracting more IPOs. Out of the S$5.5 billion (4.3 billion) raised in IPOs so far this year, S$3.5 billion is from REITs and property trusts, an SGX spokesperson said.

"The window is probably closed," said an analyst who asked not to be named. "If a REIT wants to list now, it would be very difficult," he said, adding the IPO of Soilbuild Business Space REIT might have been the last for a while. Soilbuild Business Space REIT, which started trading on August 16, is around 10 percent below its S$0.78 IPO price.

(Read more: Singapore Exchange says IPO pipeline will 'step up')

But while the analyst expects REITs to remain volatile, "one thing that hasn't changed is that the dividends are very consistent. We will not see negative surprises in dividends," he said.

Still, not everyone agrees the boom days are over for the sector.

(Read more: Is the heat off Asia's hottest property markets?)

"Singapore's market will continue to be quite a good place to raise money for the REITs," said Gregory Yap, head of research at Maybank-Kim Eng. "Where else can they go," he said, noting Singapore's investors are familiar with REITs.

"At this point, people are looking for places to hide. The REIT sector is actually one good place to do so," he added, noting the Singapore dollar is likely to remain much more stable than the currencies of its emerging market neighbors.