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

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. 

REITs are not fixed income: watch the economy 

  • 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. 

Industrials have priced in downside; not retail 

  • 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%.

SREITs Comparison

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