Singapore Industrial Reits

DBS Vickers Research, Dec 19

THE industrial sector performed better than expected in 2013, as demand growth kept up with supply completions.

As a result, rental and capital values inched up, albeit at a more moderate rate of 5-7 per cent. Looking ahead, we see outlook turning modest, owing to a significant supply pipeline of 51.8 million square feet (+12 per cent supply expansion) of industrial space currently under construction/planning, which is projected to be completed over Q4 2013-15.

Growing demand and high pre-commitments will limit downside in rents. While supply growth is significant, we believe that earnings downside is mitigated by an estimated 70 per cent of the space already pre-committed or to be filled given a brighter economic outlook.

Demand for space will likely come from firms looking to consolidate or expand operations to a single base, with an aim of improving production efficiency. In addition, firms that invested significantly in capital expenditure are likely to prefer to renew leases. This is expected to limit declines in spot rents to 3-5 per cent over 2014-15, amid a 2-percentage point rise in vacancy rates.

Industrial landlords see minimal earnings risks as reversions to remain positive. We expect landlords to be realistic in their rental expectations and thus, retention rates should remain fairly high. Rental reversions are likely to remain positive, buffered by low expiring rents which are estimated to be about 7-15 per cent below market levels. This being so, we believe that earnings risk is minimal and forecast industrial Reits to deliver FY2013-15 forecast DPU (distribution per unit) growth of about 3 per cent.

Acquisition growth will moderate. On the inorganic growth front, competition for assets is expected to remain with eight listed industrial Reits, while recent new policy measures by JTC to tighten selling restrictions for industrialists and Reits mean that the pool of investable assets will shrink but transactions, if any, will be of stronger asset and tenant quality. Industrial Reits are likely to focus on development or asset enhancement activities to optimise returns.

Across the industrial Reits, we expect Mapletree Industrial Trust to deliver higher growth of 5 per cent compounded annual growth rate over FY2013-15 forecast (versus sector's average of 3 per cent). Cache Logistics Trust continues to offer visible and high yields of close to 8.2-8.5 per cent.