Singapore’s largest bank – DBS Group Holdings – has been hitting record highs recently. Meanwhile, Singapore’s much-loved real estate investment trusts (REITs) have been struggling to fully regain their prior popularity despite a recent rebound.

It’s an interesting setup for many investors who invest in both Singapore bank stocks and REITs, but here’s one question I’ve been getting a lot recently and I thought I’d address it.

This has been one of those “timeless” questions from Singapore investors over the past few years and it could easily apply to those investing in the US stock market who hold big banks – like JPMorgan Chase or Bank of America – but who might want to switch into more interest-rate sensitive sectors like REITs or Utilities.

However, it’s not a simple equation of “low rates = bad for banks but good for REITs”. Indeed, another question that many in the Lion City have been asking is “Is DBS too expensive to buy right now?” and that’s a valid question.

In terms of interest rates, they play out over cycles and Singapore’s banks (as well as many others in fact) aren’t as sensitive to gradual declines in rates, which is what we’re seeing play out now.

Unless there’s a massive recession that induces the US Federal Reserve to slash rates to close to 0%, then the decline in banks’ net interest income (NII) over the next 12-18 months should be completely manageable.

That’s mainly because most banks now have levers to pull to offset the decline in NII, whether that’s wealth management (think DBS’s hugely profitable franchise) or credit cards. If rates come down, investors are more likely to invest and that’s good news for wealth management fees.

Same goes for credit card spend. If the global economy can hum along and notch up 2% to 3% growth then card spending from consumers is likely to continue growing at a decent clip.

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Conversely, the benefits of lower rates take time to feed through to Singapore REITs. They felt the gut-wrenching blow of higher rates in 2022 but that was mainly in the form of loans that got rolled over in the years that followed.

Remember, many REITs had longer-tenure debt that didn’t immediately reset following higher rates but even if rates come down over the next 12 months, any debt that was taken out during Covid (or pre-Covid) will inevitably get repriced at a higher rate.

You’ve seen that weigh on distributions from Singapore REITs and it’s likely to continue to weigh in the next year or so. Management commentary from REITs, like Mapletree Industrial Trust, have said as much in recent quarters as they identify higher funding costs as keeping a cap on distributions.

Second, and perhaps a bigger factor, has been the incredible resilience of the Singapore Dollar versus both the greenback and other Asian currencies. Singapore REITs now have global or regional portfolios and currency moves significantly impact their Singapore-dollar earnings.

If the SGD continues to remain buoyant then investors need to remain aware of where the majority of income is coming from in the REITs that they own.

Finally, there’s the big “unknown” and that is China. Many Singapore REITs have significant portfolios in China, whether it’s logistics or commercial property. Negative rental reversions in China continue and when a true “bottom” is going to come in is anyone’s guess.

In short, investors either need to remain extremely selective when picking individual REITs or they could go for a diversified REITs ETF listed on the SGX, with various ones focused on either Singapore or broader Asia.

Personally, I think the funding reset for Singapore REITs is still to fully play out given the lack of broad-based distribution growth in the S-REIT space – bar the odd REIT like Keppel DC REIT or Parkway Life REIT that don’t offer up attractive yields.