Industrial Reit sector

CIMB, Oct 14

THE prices of industrial properties have doubled in the past three years, outpacing the rise in rentals (42 per cent). With increasing speculation in the industrial property sector since 2011, there has been growing pressure on the Singapore government to cool this market.

The government has introduced several measures, including: a seller's stamp duty (SSD); the upfront payment of land premiums to the JTC for the remaining part of lease terms, if any JTC industrial land is sold to a non-industrialist; and a debt servicing framework for property loans, which caps the total debt servicing ratio (TDSR) at 60 per cent of a borrower's income.

For commercial and industrial properties, a 4.5 per cent rate is used for TDSR computation.

Transactions in the industrial market for 9M2013 had dropped by about 45 per cent from the 3,475 a year ago. In addition, the total value of transactions had dropped by 23 per cent y-o-y to S$4.45 billion.

In July, a spike in transacted value was mainly led by the listing of new Reits.

As a result of the heightened regulation of the industrial property market and compressed cap rates for industrial properties of 6-6.5 per cent (from their long-term historical average of 6.5-7.5 per cent), industrial Reit managers have been finding it more difficult to acquire yield-accretive properties.

We expect to see fewer Reits reporting distribution per unit growth through the acquisition of new assets in Q3-13. Among the five industrial Reits under our coverage, only Ascendas Reit and Mapletree Logistics Trust completed their previously announced acquisitions in 3Q13 of a business park in Shanghai (with a rental guarantee of S$13.5 million) for A-Reit and The Box Centre in South Korea at an initial net property income (NPI) yield of 8.4 per cent for MLT in July. No new acquisitions were announced in Q3.

Rental indices for different types of industrial property have moved along with the growth in Singapore's manufacturing production index (MPI). On this basis, with a flat MPI forecast for Q3-13, we expect rental rates to have remained resilient during the quarter.

Even though the outlook for industrial properties may appear less sanguine than before, industrial Reits may continue to book positive rental reversions over the next few quarters as the leases renewed today are from lower rent bases.

In addition, as the land leases of industrial sites have been shortened to 30 years (from 60) coupled with the volatility in global markets, several Reit managers have warned of the increasing difficulty of engaging in build-to-suit (BTS) projects as their returns have been lowered by the shorter land tenures.

In summary, although we expect stable earnings in the upcoming results season, we believe there will be no upside surprises from the industrial Reits under our coverage.

Within the industrial space, our order of preference is unchanged: Cache Logistics, Ascendas Reit, Cambridge Industrial, Mapletree Industrial Trust and Mapletree Logitsics Trust.

All five face a lack of acquisition targets, a less sanguine rental outlook (with weak forecasts for the business-park space) and the growing difficulty of finding projects in the BTS/redevelopment market.

We expect an increasing number of Reits seeking yield-accretive targets outside Singapore. We remain Neutral, with Cache and A-Reit as our preferred choices.

NEUTRAL