Hunting for yield? DBS analysts betting on S-Reits over bank dividends
Yield gap between both is widening, but rising bond yields and interest rates bear watching
[SINGAPORE] Investors hunting for dividend income may want to look beyond Singapore banks and towards real estate investment trusts (Reits), as the yield gap between the two sectors hits a multi-year high.
Singapore-listed Reits (S-Reits) yield about 6.2 per cent in dividends on average, compared with around 4 per cent for the trio of local banks: DBS , OCBC and UOB .
The difference of 2.2 percentage points between the two groups – known as the yield spread – exceeds levels seen from 2022 to 2024 during the interest rate hike cycle, said DBS Research Group in a note on Monday (Aug 31).
In short, this means that S-Reits offer more in annual distributions than Singapore banks.
The case for S-Reits
DBS’ analysts noted that S-Reits and banks are favoured as dividend plays among investors.
The banking sector, in particular, has hiked dividends since 2022 on the back of strong earnings from net interest margin expansion, a higher interest rate environment and a focus on shareholder return.
“(But) while banks historically outperformed in rising-rate environments… the backdrop today is different,” said the analysts.
For one thing, the strong price performance among Singapore banks has lowered their average dividend yield year to date.
On the other hand, the three-month compounded Singapore Overnight Rate Average has fallen from its peak of 3.7 per cent to a range of 1.1 to 1.2 per cent. This gives S-Reits a “still meaningful” earnings buffer as they refinance at lower benchmark rates.
S-Reits also expect to show a distribution per unit (DPU) growth of about 3 per cent annually from 2026 to 2027, further reinforcing the case for investors to allocate capital to such trusts.
However, other commentators have noted that surging US Treasury yields could threaten the valuations of rate-sensitive S-Reits while boosting local bank margins.
Resilient fundamentals
DBS expects small and mid-cap S-Reits to continue leading the DPU growth charge.
These Reits delivered a stronger DPU growth of around 5 per cent year on year in the first half – significantly outpacing the 1 per cent growth delivered by large-cap peers over the same period.
Their performance suggests that “alpha opportunities” remain within the small and mid-cap space, where more attractive valuations are complemented by stronger earnings growth, said the analysts.
They expect DPU growth for small and mid-cap S-Reits to accelerate by 4 per cent in the second half of the year from the first half, compared with just 1 per cent for large-cap S-Reits.
Also boosting their case for the broader S-Reit sector are lower refinancing costs and healthier balance sheets as a result of the trusts’ active asset recycling.
“With robust real estate fundamentals continuing to underpin positive rental reversions, we believe investors will increasingly favour S-Reits that offer greater ‘certainty of growth’,” said the analysts.
DBS names its picks
Accordingly, DBS said it prefers office S-Reits the most, followed by industrials, retail and hotels.
The brokerage favours office S-Reits due to record-low Core Central Business District Grade A vacancy rate of 3.3 per cent and a tight supply pipeline.
Industrial Reits are supported by structural demand in data centres, which helps offset softer overseas logistics performance.
Meanwhile, retail assets remain resilient due to near-full occupancies, and hospitality trusts are poised for a seasonally stronger second half driven by major events and concerts.
CapitaLand Integrated Commercial Trust, Parkway Life Reit, Centurion Accommodation Reit, NTT DC Reit and Lendlease Global Commercial Reit “stand out for their stronger relative growth and total-return profiles”, added the brokerage.
Meanwhile, Mapletree Logistics Trust and CapitaLand Ascendas Reit offer “valuation appeal”, as they trade at “below-average” price-to-book value multiples and yields closer to negative one standard deviation.
Suntec Reit remains the brokerage’s preferred “value-unlocking play”, with the outcome of its strategic review expected to be unveiled in the second half.
“Overall, we favour a barbell of visible DPU growth and identifiable value-unlocking catalysts, rather than yield alone,” said the note.
