‘Unlocking alpha’: Mid-cap S-Reits could outperform larger-cap peers, says DBS

[SINGAPORE] A “fertile hunting ground for alpha” is emerging as measures by the Equity Market Development Program (EQDP) bear fruit, said DBS on Wednesday (Feb 25).

Mid-cap Singapore-listed real estate investment trusts (S-Reits) offer opportunities for “unlocking alpha”, with potential to outperform larger-cap peers, noted the bank.

Such S-Reits have been thrust into the spotlight as EQDP efforts have helped to lift sentiment and broaden participation beyond larger-cap peers, said DBS analysts Derek Tan, Dale Lai, Geraldine Wong and Tabitha Foo.

This comes as the introduction of the iEdge Singapore Next 50 Index has provided “a clearer framework for investors seeking exposure to the next tier of market leaders”, they pointed out in a report.

The analysts highlighted that the cohort of S-Reits on the iEdge Singapore Next 50 Index offers close to 2.5 times the growth profiles of their large-cap peers, with “more meaningful uplifts from a steady operational outlook and a conducive interest rate environment”.

“With interest rates in Singapore remaining anchored still at relatively low levels, we anticipate increased activity from yield-hungry investors, EQDP fund managers deploying capital into quality mid-cap names, and the earnings upgrade cycle elevating expectations and valuations,” they added.

DBS remarked that 16 S-Reit constituents on the iEdge Singapore Next 50 Index “offer a diversified mix across office, retail, industrial and hospitality segments”.

While the overall sector’s valuations remain compelling, with a price-to-book (P/B) ratio of 0.95 times and projected FY2026 yields of 5.7 per cent, the bank noted that the cohort of iEdge Singapore Next 50 S-Reits offers even more compelling valuations – with an average P/B ratio of 0.9 times and a forward yield of 6.3 to 6.5 per cent.

Moreover, this cohort of S-Reits currently trades at a roughly 20 per cent discount to the Straits Times Index (STI) S-Reits, which trade at an average P/B ratio of 1.1 times.

With the valuations of these mid-cap S-Reits lagging larger-cap peers, DBS analysts highlighted a potential re-rating upside. “We see (an) attractive entry point into a sector entering the early phases of a re-rating cycle.”

DBS’ potential alpha picks include Keppel Reit , , NTT DC Reit and CapitaLand Ascott Trust , which stand out for “attractive valuations, improving liquidity and clear catalysts into FY2026”.

The bank noted that key risks for mid-cap S-Reits include a more hawkish US Federal Reserve leading to a rebound in Singapore Overnight Rate Average (Sora) rates and a global recession driving more conservative positioning.

Lots of potential

With attractive total return profiles, mid-cap S-Reits could outperform larger-cap peers, added DBS.

“Crucially, we see the mid-cap S-Reits offering (more than) a yield-focused story,” the bank said.

It noted that the cohort of S-Reits on the iEdge Singapore Next 50 Index is expected to deliver a total return of around 10.4 per cent – above the total return of around 7 per cent expected from their larger-cap S-Reit peers.

“This highlights a more attractive risk-reward profile, particularly for investors seeking both income and growth.”

Moreover, DBS expects this to deliver an average distribution per unit (DPU) compound annual growth rate of around 4.2 per cent for FY2026 to FY2027. This is almost 2.5 times the roughly 1.7 per cent growth projected for S-Reits on the STI.

This potential outperformance of mid-cap S-Reits could be underpinned by stronger organic growth drivers, including firmer rental reversions and occupancy uplifts.

Acquisitions and a “more meaningful uplift from refinancing as Sora rates remain low” could also drive outperformance, added DBS.

Turnaround and value-unlocking opportunities

The lender said that Suntec Reit and Digital Core Reit could stage a “potential turnaround”, given their “value-unlocking opportunities”.

It noted that Suntec Reit “warrants a re-look”, as the Reit is expected to execute its value-unlock strategy. Suntec Reit may get positive rental reversions, especially for Singapore offices and Suntec City Mall, DBS said.

Meanwhile, Digital Core Reit offers “higher-beta growth optionality”, DBS noted. It added that optimism for the Reit will likely edge higher as FY2027 approaches. A roughly 16 per cent jump in DPU is expected then as its Linton Hall data centre facility is backfilled.