Hunting for yield? S-Reits may offer more than banks, say DBS analysts

Investors seeking dividend income may consider real estate investment trusts (S-Reits) over Singapore banks, as yield data indicate the gap between the two sectors has widened to a multi-year high. S-Reits currently yield an average of 6.2% in dividends, compared to about 4% for the local banks DBS, OCBC and UOB. This 2.2 percentage point difference in yield, or the yield spread, is higher than the range from 2022 to 2024 during the last interest rate hike cycle.

Analysts from DBS Research Group attribute this higher yield spread to the strong performance of Singapore banks, which has reduced their average dividend yield year-to-date. Meanwhile, the three-month compounded Singapore Overnight Rate Average has fallen from 3.7% to a range of 1.1-1.2%. These factors give S-Reits a "still meaningful" earnings buffer, as they can refinance at lower benchmark rates.

S-Reits also show promise in terms of annual distribution per unit (DPU) growth. Analysts project a 3% DPU growth for S-Reits from 2026 to 2027. Small and mid-cap S-Reits, in particular, are expected to deliver a stronger DPU growth of around 5% year-on-year in the first half of the year, compared to 1% for large-cap peers. This trend suggests that "alpha opportunities" remain in the small and mid-cap space, where better valuations go hand in hand with stronger earnings growth.

Lower refinancing costs and healthier balance sheets, resulting from trusts' active asset recycling, also bolster the case for S-Reits. Additionally, the strong fundamentals of the real estate sector are expected to drive positive rental reversions, further supporting investment interest in S-Reits. DBS analysts prefer office S-Reits due to Singapore's low vacancy rate and tight supply pipeline, followed by industrial, retail, and hospitality S-Reits.