Singapore REITs - Maybank Kim Eng 2015-11-30: Industrials ~ Cleanest Dirty Shirt

AREIT ASCENDAS REAL ESTATE INV TRUST A17U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI

Industrials: Cleanest Dirty Shirt

SREITs have declined 16% off their Apr15 peaks and are 11% down YTD. Over the same periods, the STI is down 19% and 15%. We maintain that SREITs are in a de-rating phase, more sensitive to growth risks than interest rates.
Compounding weak demand, 2016-18 supply is front loaded but averaging 2.0x historical demand for retail, 1.4x for office and 1.2x for industrial.
Industrial REIT valuations seem to have priced in the negatives. Not so for retail. For office, to a certain extent. Areit & MINT are our recommended picks. Top SELLs: FCT, MCT, CT.

In line with the price falls, SREIT yields have de-rated 16% from their Apr15 lows. We argued on our 8 Sep 2015 report that SREITs are in a de-rating phase, being more sensitive to dim economic prospects than whether interest rates rise or not. Investors would do well to recognize that REITs are not fixed income – borderline economic prospects raise the specter of declining occupancies and weaker rent reversions.
To be sure, the fact that interest rates are in fact rising, is an additional negative.
We would reconsider this call if economic prospects improve.
Industrials supply/demand: the cleanest dirty shirt.
Compounding weak demand is strong supply from 2016-18 for all sub-sectors: 2.0x historical demand for retail, 1.4x office, and 1.2x industrial, making industrial the cleanest dirty shirt.
Supply for industrial should taper below demand in 2017-18, while for retail supply could exceed demand throughout.
We expect occupancy and rent reversions to be more challenging for retail and office than for industrial. Industrial REITs have had the best results 9M15.

Valuations suggest that industrial SREITs have priced in the most downside as Areit and MINT are trading slightly below their target yields while AAREIT and Cache are above.
In the office space, it also appears that much of the downside has been discounted, with CCT and KREIT trading slightly below yield targets. The exception is SUN.
In line with our 9 Oct report, we remain the most negative on retail: CT, MCT and FCT are all trading way below target yields, suggesting downside risks of 11.5-13.3%.
We advocate hiding in industrial REITs, recommended picks Areit and MINT.
Areit is 63% exposed to business parks and warehouses which face the tightest supply. Occupancy has been improving sequentially from a low base. FY3/16-18 c.3.8% DPU growth from the Aperia and the new Aussie logistics portfolio.
MINT’s occupancy is also improving sequentially despite a challenging factory market. We expect DPU resilience in FY3/16-17 but 9.8% DPU growth in FY3/18 from major projects. FY3/18-19 yields are attractive at 7.8-8.1%.

Joshua Tan Maybank Kim Eng | Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-11-30

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