More pain to come for Singapore REITs?

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.

More pain to come for Singapore REITs?