Ascendas REIT - RHB Invest 2016-03-16: No Other Better Way To Ride On Business Parks

Ascendas REIT - RHB Invest 2016-03-16: No Other Better Way To Ride On Business Parks Ascendas REIT ASCENDAS REAL ESTATE INV TRUST A17U.SI 

Ascendas REIT - No Other Better Way To Ride On Business Parks 

  • There is no better way to get exposed to the resilient business park space, other than owning Ascendas REIT. 
  • In our view, business parks are the crown jewels of the real estate industry. 
  • Additionally, we expect some organic growth as its average expiring rental rate for the following financial year is well below the current market rate. Therefore, we think investors can be exposed to a great blend of both resilience and growth with this REIT. 
  • Maintain BUY with a higher DDM-derived SGD2.63 TP. 

The best way to ride on the business and science park space. 

  • Ascendas REIT has one of the highest exposures to the favourable and resilient business and science park space among its industrial peers. 
  • As we highlighted in our sector update report, the competitive advantage that the business park space possesses is its low-cost advantage, which explains the increasing trend for businesses to shift from an office to a business park space. 
  • In addition, there is no business park space in the pipeline beyond 2016, which suggests that the strong demand for such parks would persist in the longer timeframe. This is why we admire Ascendas REIT, as it is the only REIT that has a high exposure to the business park space with a wide tenant base diversity. 

Expect positive rental reversion as expiring rental rates are below current market rate. 

  • We are expecting positive rental reversion for Ascendas REIT to persist around the mid to single-digit (4-5%) beyond FY17, as we note that its weighted averaged existing rental rates in both FY16 and FY17 are below the current market rate. 
  • Additionally, most of the renewals (in terms of area) would be done within the logistics and distribution segment, which has the widest spread from the current market rate. 
  • Lastly, though the average expiring rate for business parks is close to the current market rate, we remain optimistic. This is because we think that business park space demand is likely to remain strong. 

We love it Down Under too! 

  • We like the fact that Ascendas REIT is now exposed to the matured and stable Australian market (c.12% of total portfolio value). 
  • We think that it is an opportunistic move by the REIT to move into Australia, especially when growth within the local industrial market is limited. 
  • Not only can Ascendas REIT easily conduct accretive acquisitions in Australia (cap rate: c.7%), Australian assets typically also provide stability, with their triple net lease structure and a built-in annual rental escalation of 3-4% pa. This mitigates any uncertainties in the cyclical real estate business. 

Key downside risk: 

  • Softer rental reversion of the REIT’s business park assets. 

Maintain BUY with a higher TP. 

  • We maintain our BUY recommendation as we upgrade our TP to SGD2.63 (from SGD2.50) as we adjust +10bps to our TG rate to 1.45%. The counter is now yielding an attractive FY17F (Mar) dividend yield of 6.6%.

Ivan Looi RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-16
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.63 Up 2.50