Singapore Industrial REITs - Phillip Securities 2016-02-12: JTC data for 4Q15 & portfolio status

Singapore Industrial REITs - Phillip Securities 2016-02-12: JTC data for 4Q15 & portfolio status CACHE LOGISTICS TRUST K2LU.SI  KEPPEL DC REIT AJBU.SI  SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Singapore Industrial REITs - JTC data for 4Q15 & portfolio status 

  • Sector occupancy fell q-o-q to 90.6%, as a 1.2% increase in supply outstripped a 0.9% increase in demand 
  • Total stock of industrial space increased by 1.6mn sqm to 44.5mn sqm in 2015 
  • JTC estimates 2.9mn sqm more industrial space in 2016 
  • Strategic top-down view: Negative on the Industrial S-REITs sub-sector due to oversupply of space 
  • Tactical bottom-up view: Maintain exposure to REITs with strong underlying demand drivers and ability to ride out the oversupply situation; avoid REITs facing significant portfolio exposure to master lease expiries. 



 Lower rent is better than zero rent 

  • A recurring theme that we heard this quarter during the results briefings is that the outlook remains challenging. The REIT Managers are keen to retain tenants and are prepared to lower rents in order to retain them and maintain occupancy, as it would be difficult to sign on new replacement tenants. 

 Conversions from master leases to multi-tenancies continue to apply pressure 

  • The conversion of master leases had a negative impact on Net Property Income (NPI) at AIMS AMP Capital Industrial REIT (AA REIT), Cache Logistics Trust (Cache), Mapletree Logistics Trust (MLT) and Sabana Shari'ah Compliant REIT (SSREIT). 
  • Conversion of a weak property from master lease to multi-tenancy will result in lower portfolio occupancy, higher property expenses and lower NPI. 

 Some assets were unable to hold their value and were re-valued downwards 

  • Cache, Cambridge Industrial Trust (CIT), SSREIT, Keppel DC REIT (KDCREIT), Soilbuild Business Space REIT (SBREIT) and Viva Industrial Trust (VIT) ended their fiscal year in December 2015 and their respective portfolios were re-valued. 
  • KDCREIT, SBREIT and VIT recorded revaluation gains, while Cache, CIT and SSREIT recorded revaluation losses. 
  • SSREIT suffered the biggest loss within the sub-sector, with its portfolio being revalued downwards by 9%. 


  • The Industrial S-REITs currently under our coverage are Keppel DC REIT (KDCREIT), Soilbuild Business Space REIT (SBREIT) and Cache Logistics Trust (Cache). 

  • - Keppel DC REIT: Accumulate, Target price: S$1.13 – 

    Proxy to explosive growth in data requirements. 

    • Explosive growth underpinned by four factors: 
      1. Growth in data creation and data storage needs, 
      2. Growth in cloud computing, e-commerce and online shopping, 
      3. Increasing compliance and regulatory requirements on data security, and 
      4. Continued trend of outsourcing of data centres. 

    Key risks for KDCREIT 

    • Weakening foreign currency vs. SGD will impact rental income, but this is mitigated by a rolling two-year forward hedging policy. 
    • Acquisition of T27 from the Sponsor's pipeline is expected in 1H 2016. However, our back-of-the-envelope estimate suggests that the acquisition might not be DPU-accretive to Unitholders. 

  • - Soilbuild Business Space REIT: Accumulate, Target price: S$0.86 – 

    Business Park spaces will be in short supply as there are no new spaces coming on-stream after 2016. 

    • SBREIT should be relatively unscathed in the Business Park (BP) sector. JTC data for 4Q15 showed that Business Park rental index was down 1.2% y-o-y while occupancy was up 4.3% y-o-y. There has been slight downward pressure on rent as new supply came on stream, but the higher occupancy indicates a healthy level of absorption of the new space. 
    • SBREIT has two BP properties. Solaris is on a master lease that expires in 3Q 2018 and will be unaffected by the BP demand/supply dynamics till then. Eightrium is a multi-tenanted building that currently has 100% occupancy. Passing rent for the property is currently in line with market rent, and we believe that tenant renewal should be healthy. 
    • SBREIT's stability underpinned by a portfolio predominantly of master leases. All of SBREIT's properties are on master leases, except for three multi-tenanted properties: Eightrium (Business Park), West Park BizCentral (Ramp-up factory) and Tuas Connection (Factory). None of their master leases are expiring within the next two years. 14.9% of multi-tenancies by net leasable area (NLA) are up for renewal in 2016, of which 2.3% has already been forward renewed, leaving 12.6%. 

    Key risks for SBREIT 

    • Renewal at West Park BizCentral and Tuas Connection could be sluggish. Occupancy at West Park BizCentral is 94.2%, while one of the fifteen units at Tuas Connection is vacant (93.5% occupancy). Downside to portfolio occupancy could come from these two properties. 

  • - Cache Logistics Trust: Reduce, Target price: S$0.82. – 

    Sluggish renewals and new leasing impacted portfolio valuation. 

    • Possible overhang of supply of warehouse space going into 2017, stemming from the overflow of unabsorbed space in 2015 and 2016. 
    • Although about 72% to 78% of new warehouse space is pre-committed, but this also creates an equivalent potential shadow space in the market. 
    • Moreover, Cache's Singapore Properties portfolio was revalued downwards by S$45.9mn to S$1.12bn – testament to the tough times ahead. 

    Key risks for Cache 

    • Two more master leases expiring in 2H 2016. The master leases expiring at Schenker Megahub (3Q16) and Hi-Speed Logistics Centre (4Q16) substantially account for the 12% of leases by Gross rental income (GRI) expiring in 2016. The master lease of Air Market Logistics Centre (expiring in 3Q16) has been forwardrenewed with single-digit negative reversion. 
    • We are mindful that several master leases from SSREIT were also renewed with negative reversions in 4Q15. 
    • We believe that in a best case scenario, Schenker Megahub and Hi-Speed Logistics Centre will both be renewed with negative reversions; worst case scenario would be conversion to multi-tenancy.


New Industrial space in 2016 and 2017 is equivalent to about 6% and 3% respectively, of current available stock. 

  • JTC estimates about 2.9mn sqm and 1.6mn sqm of industrial space to come on-stream in 2016 and 2017 respectively. The current existing stock of Industrial space is 44.5mn sqm as of 4Q15. 

Further downward pressure on sector occupancy rates expected as new supply exceeds new demand. 

  • The additional space coming on stream is significantly higher than the average annual supply of around 1.7mn sqm in the past three years. 
  • Historical average demand over the past three years was 1.2mn sqm. 


Negative on the Industrial S-REITs sub-sector due to oversupply of space 

  • As highlighted, there will be an imbalance in supply/demand dynamics in 2016 going into 2017. This will result in a tenant's market and applying downward pressure on both occupancy and rent. 


Maintain exposure to REITs with strong underlying demand drivers and ability to ride out the oversupply situation 

  • KDCREIT has a unique asset class of data centres with strong underlying demand drivers. Its portfolio is diversified across seven cities, with 41% of FY15 GRI being derived from within Singapore. BroadGroup Consulting Ltd forecasts utilisation rate to increase with supply lagging demand growth, thus improving occupancy due to high absorption. 
  • A way to ride out the oversupply situation is to be on master leases that are not expiring within the next two years – SBREIT is one such REIT. 

Avoid REITs with significant portfolio exposure to master lease expiries 

  • SSREIT has at least four properties (14% by portfolio value) with master leases expiring within the next two years (22% and 5% by NLA in 2016 and 2017 respectively). 
  • CIT has highlighted that it has eight properties on master leases that are expiring in 2016 (13% of GRI), with another 7% by GRI in 2017.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-02-12
Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 0.82 Same 0.82
ACCUMULATE Maintain ACCUMULATE 1.13 Same 1.13
ACCUMULATE Maintain ACCUMULATE 0.86 Same 0.86