The REITs Pulsebeat - Positive Signals For Industrial
- Recent PMI and manufacturing output data indicates that the manufacturing sector is set to see steady growth. This augurs well for industrial demand.
- While supply pressures remain as an overhang, a pick- up in demand ensures that rentals and capital values are unlikely to decline sharply. The business park segment is still the most favourable, on the back of very limited supply.
- Meanwhile, speculation of a potential consolidation among smaller industrial REITs may act as a re-rating catalyst for the sector.
- Top Picks: Ascendas REIT and Viva Industrial Trust.
Positive economic data points to better industrial demand.
- Singapore’s official Purchasing Managers’ Index (PMI) for March rose 0.3 pts MoM to 51.2, recording a seventh consecutive month of expansion.
- All indicators showed a faster expansion, save the slower expansion in finished goods and order backlogs.
- Manufacturing output for February also grew by a strong 12.6% YoY, aided by a strong performance from the electronics (+39.8%) and precision engineering (+26.2%) segments. This positive data bodes well for the industrial sector’s demand and would help alleviate some of the supply pressures.
- Our channel checks with industrial landlords confirm that industrial demand has been showing signs of picking up since the beginning of the year.
Overhang in supply persists while business parks are still the best bet.
- On supply, business parks remain the most favourable segment, with no new supply coming in until 2019. Based on CBRE data, c.10.1m sqf of new factory supply is expected to come on-stream this year vs the 3-year average net demand of 8.8m sqf.
- For warehouses, c.6.4m sqf of new supply is expected to come on-stream, vs the 3-year average net demand of 5.5m sqf.
- Overall, we expect factory and warehouse rental rates to decline 3-7% in 2017 on the back of supply pressures, while business parks rental rates are anticipated to increase 1-5%.
Potential REIT consolidation could act as a key re-rating catalyst.
- In January, e-Shang Redwood (ESR), a subsidiary of Warburg Pincus, announced the acquisition of a 80% stake in Cambridge Industrial Trust (CIT) and also became its second biggest shareholder, with the acquisition of a 12% stake. ESR also lately emerged as a substantial shareholder of Sabana Shari’ah Compliant REIT (5% stake), which is currently undertaking a strategic review of its portfolio.
- Separately, Warburg Pincus will own a 30.7% stake in ARA Asset management (ARA) post its successful privatisation bid. ARA manages a portfolio of REITs and has a 60% stake in the manager of Cache Logistics Trusts.
- We believe these recent moves act as a precursor to potential consolidation among the smaller industrial REITs. Such a consolidation, if it happens, would be positive and trigger a valuation rerating by narrowing discounts to NAV for smaller REITs.
Industrial REITs segment is the best performer YTD.
- YTD, industrial REITs are up 8.8%, outperforming S-REITs’ 6.8% but are slightly below the STI’s 9.8%.
- Despite the outperformance, the segment on average offers a forward dividend yield of 6.6% and trades at 1.1x P/BV.
- Among the big-cap industrial REITs, we prefer Ascendas REIT for its well-diversified portfolio, strong parent and favourable exposure to the science park and business park segments.
- In the small-cap segment, We like Viva Industrial Trust for its high yields, master lease profile and high exposure to the business parks segment (55% of asset value).