Analysts and investors are questioning whether the rally in Singapore's real estate investment trusts (Reits) has room to run.
Strategists from Morningstar to CMC Markets Singapore say Reits, which have gained more than twice as much as the broader equity market this year, are starting to look overvalued and may not see such strong performance in the second half.
The FTSE Straits Times Real Estate Investment Trust Index has surged 18 per cent so far this year, closing last week at the highest since 2007. The gauge traded at 1.2 times book value on Friday, the most expensive in over six years.
"One will need to be selective when investing in Reits," said Morningstar analyst Ken Foong in Singapore. "Most of them have gone up to being overvalued."
Mr Foong has sell ratings on CapitaLand Commercial Trust, CapitaLand Mall Trust and Ascendas Real Estate Investment Trust, and a hold on Suntec Real Estate Investment Trust.
"For the four Reits that we cover, the dividend yield is below their 10-year historical average," he said.
The Reit index's estimated 12-month forward dividend yield stood at 5.13 per cent at the end of last week, down from 6.22 per cent at the start of the year.
"The rally of Singapore Reits seems to have been overstretched for now, and profit-taking activities are kicking in," CMC Markets Singapore strategist Margaret Yang wrote in an e-mail. "Rich valuation and relatively less attractive yield compared to the banking sector have rendered Reits susceptible to some short-term sell-off."
UBS Global Wealth Management lowered its weighting for Singapore Reits to neutral from overweight in April.
"Reits have had a tremendous run, so we do think that they look fairly valued," Ms Tan Min Lan, head of the Asia-Pacific chief investment office for the wealth manager, said at a press briefing this week. "A lot of the good news is priced in."
UBS Global Wealth is overweight on Singapore banks, some of which offer estimated forward dividend yields of close to 5 per cent. Ms Tan said the industry provides "better bang for your buck" for yield-hungry investors.
Some analysts remain optimistic about Reits. Singapore Reits boast the highest dividend yields across all major Reit markets, according to Mr Jason Low, a senior investment strategist at DBS Group Holdings' wealth management unit.
As bond proxies, they will also get a boost from interest rate cuts in the United States, said portfolio strategist Rainer Michael Preiss at Taurus Family Office.
Nevertheless, Mr Low said that while DBS is still recommending Reits to clients, it expects returns to be more modest. The Reit index fell 1.4 per cent on Tuesday, a second day of declines.
"Investors should not expect the kind of strong returns seen in the first half," he said.