Singapore REITs Industrial sub-sector - Phillip Securities 2017-02-20: Possibility of rents bottoming this year

Singapore REITs Industrial sub-sector - Phillip Securities 2017-02-20: Possibility of rents bottoming this year S-REIT Sector Outlook Industrial REITs CACHE LOGISTICS TRUST K2LU.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI KEPPEL DC REIT AJBU.SI SOILBUILD BUSINESS SPACE REIT SV3U.SI

Singapore REITs Industrial sub-sector - Possibility of rents bottoming this year

  • Lower yoy sector-wide occupancy and rental; qoq improvement in occupancy.
  • Sector's Rental Index has fallen below 2012 levels, with rental reversions likely to maintain at negative high single-digit to negative low double-digit.
  • Multiple-User Factory and Warehouse rental reversions maintained at negative double-digit from previous quarter and likely to be maintained in 2017.
  • Factory space was the hardest hit in 4Q 2016 with an onslaught of new supply.
  • Supply pressure in 2017 for Warehouse space is going to be worse than 2016.
  • Expect reversions for Business Parks to be flat.
  • We believe rents could bottom in 2017, but emphasize that negative rental reversions to persist.
  • Upgrade Industrial sub-sector to "Equal Weight" on optimism of bottoming of rents.
  • Maintaining our "Underweight" view on the overall S-REITs sector.


What Is The News?



Key takeaways from the quarter 


Reversions were generally negative, again only a minority bucked the trend 

  • Generally negative reversions across the Industrial REITs, as the oversupply condition persists with muted demand. 
  • Exceptions of positive portfolio weighted average rental reversions during the quarter came from Ascendas REIT (A-REIT) (+3%) and Mapletree Industrial Trust (MINT) (+2.1%). 
  • Keppel DC REIT (KDCREIT) renewed a major lease in one of its Singapore properties for five-years, at approximately 3% higher rent than the preceding rate.

Certain portfolios revalued downwards 


Possible bottoming of rents, but still a tenants' market 

  • We observed that asking rents being posted by leasing agents had stabilised during the quarter. 
  • Our channel check suggests that there is still a fair amount of leasing activity on the ground and that rents may be bottoming. This was corroborated by one of the REIT CEOs during the results briefing who opined that we are close to the bottom for Industrial rents. 
  • We do however draw a distinction between rent level and rental reversions. We still are expecting softness for the sector, with aggregate reversions to be at least in the high negative single-digit region for 2017.


Investment Actions 

  • We have downgraded our view on the overall S-REITs sector to "Underweight" in our most recent S-REIT sector report (6 February 2017)
  • In this update report, we upgrade the Industrial sub-sector to "Equal Weight" on optimism of the bottoming of Industrial rents this year.

Cache Logistics Trust (Cache) – 

  • High gearing of 43.1% is the key idiosyncratic impediment to inorganic growth 
  • "Reduce" rating from our results report on 25 January (Cache Logistics Trust - Balance sheet substantially weakened)
  • Limited scope for organic growth in gross revenue due to oversupply, mitigated by only 4.9% expiry by gross rental income in FY17 
  • In the absence of any capital distribution from the divestment of Changi Districentre 3 in January 2017, we are expecting lower year-on-year (yoy) DPU in all four quarters of FY17e 
  • We forecast 6.44/6.91 cents distribution per unit (DPU) for FY17e/FY18e, which is 13.0%/6.6% lower than consensus expectation of 7.4/7.4 cents 

Keppel DC REIT (KDCREIT) – 

  • Expecting 30% yoy higher gross revenue in FY17 driven by two acquisitions completed in FY16 and one in January 2017 
  • "Neutral" rating from our results report on 24 January (Keppel DC REIT - Visible and stable income from a unique asset class)
  • Completed the acquisition three data centres in Cardiff, Wales; Milan, Italy and Singapore However, the three acquisitions came at a cost – increasing unitholder base following the 274-for-1,000 Preferential Offering in November 2016 
  • Hedging policy in place to hedge two-years ahead for expected foreign currency denominated income does not detract from the fact that there is country risk and currency risk exposure 
  • We forecast 6.39/6.19 cents DPU for FY17e/FY18e, which is 11.3%/16.4% lower than consensus expectation of 7.2/7.4 cents 

Mapletree Industrial Trust (MINT) – 

  • Firepower to acquire: 29.4% gearing is one of the lowest within the S-REIT universe 
  • "Accumulate" rating from our results report on 25 January (Mapletree Industrial Trust - Firepower to acquire)
  • Phase One of Hewlett-Packard build-to-suit (BTS) is already contributing, Phase Two to contribute by 2Q CY17 
  • We are mindful of the 31% of leases expiring in FY18 in an oversupply landscape; about half of the leases expiring in FY18 come from the Flatted Factories segment 
  • We forecast 11.22/11.34 cents DPU for FY17e/FY18e, which is broadly in line with consensus expectation of 11.0/11.9 cents 

Soilbuild Business Space REIT (SBREIT) – 

  • Tough year ahead to backfill Loyang Way property 
  • "Neutral" rating from our results report on 25 January (Soilbuild Business Space REIT - Tough year ahead)
  • Acquisition of Bukit Batok Connection to just offset the negative effect of the Loyang Way vacancy; Loyang Way property size is 5.2% by portfolio value DPU to be weighed down by higher unit base arising from the 1-for-10 Preferential Offering in September 2016 
  • We are expecting lower yoy DPU in all four quarters of FY17e 
  • We forecast 5.47/4.87 cents DPU for FY17e/FY18e; this is 4.0%/11.5% lower than consensus expectation of 5.7/5.5 cents




Richard Leow cFTE Phillip Securities | http://www.poems.com.sg/ 2017-02-20
Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 0.730 Same 0.730
ACCUMULATE Maintain ACCUMULATE 1.740 Same 1.740
NEUTRAL Maintain NEUTRAL 1.150 Same 1.150
NEUTRAL Maintain NEUTRAL 0.680 Same 0.680





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