KEPPEL DC REIT
AJBU.SI
MAPLETREE INDUSTRIAL TRUST
ME8U.SI
CACHE LOGISTICS TRUST
K2LU.SI
SOILBUILD BUSINESS SPACE REIT
SV3U.SI
SREIT - Industrial sub-sector: Brace for a wave of negative rental reversions
- Both sector-wide occupancy and rental fell quarter-on-quarter and year-on-year.
- Sector's Rental Index has fallen to 2012 levels, implying negative reversions going forward.
- Factory space will be hardest hit in 2H 2016 with an onslaught of new supply.
- 2017 going to be worse than 2016 for Warehouse space.
- Business Park space should remain relatively unscathed.
- "Underweight" on the Industrial sub-sector due to overwhelming new supply of space, without commensurate demand.
- Tactical exposure through REITs with strong underlying demand drivers and ability to ride out the oversupply situation; wary of REITs facing significant portfolio exposure to master lease expiries
- Maintaining our "Equal Weight " view on the overall S-REITs sector.
What is the news?
- JTC recently released its Quarterly Market Report of Industrial Properties for 2Q 2016.
- Key takeaways from the quarter:
Leasing market remains soft; even Data Centre segment saw weakness
- Generally negative reversions across the Industrial REITs, as oversupply condition persists. Even the Data Centre segment was not spared – Keppel DC REIT gave a negative reversion incentive, albeit on a forward renewal to a major customer that expanded its space requirement.
- Exceptions of positive portfolio weighted average reversions during the quarter came from Ascendas REIT (+4%) with Mapletree Industrial Trust (+0.5%) lagging behind.
Tenant retention is paramount
- We heard feedback from the REIT Managers that the key focus in the current soft market conditions is tenant retention. One Manager recounted an instance where it had a prospective tenant in late stage of negotiations and was eventually undercut by the tenant's existing landlord.
Tenants are opting for shorter leases and not willing to commit to forward renewals
- Tenants are facing an uncertain outlook for their businesses and landlords are also allowing shorter lease to maintain occupancy – all in an effort to cushion the effects of the soft leasing market. Landlords are also resorting to leasing out partial units for short-term lease.
Investment Actions
- We maintain our "Equal Weight" view on the overall S-REITs sector, from our most recent sector report (dated: 18 July 2016).
- We hold an "Underweight" view on the Industrial sub-sector within the S-REITs sector in view of weak demand and onslaught of new supply.
Cache Logistics Trust – Cautious over the possible overhang of Warehouse space.
- We upgraded our rating from "Reduce" to "Neutral" in our results report on 25 July.
- Our analysis suggests that the situation for Warehouse space in 2017 will be worse than 2016.
- 25% of leases by gross rental income (GRI) expiring in FY18, substantially from the master lease of CWT Commodity Hub.
- We forecast 8.03/7.14 cents Distribution per unit (DPU) for FY16e/FY17e, which is 1%/11% lower than consensus expectations of 8.1/8.0 cents.
Keppel DC REIT – Proxy to explosive growth in data requirements.
- We maintain our "Neutral" rating from our results report on 19 July.
- Price has appreciated c.12% post-Brexit and valuations appear stretched at 1.3x P/NAV.
- Positive catalyst: impending acquisition of Keppel DC Singapore 3 (formerly known as T27) in 3Q FY16.
- We forecast 6.63/6.38 cents DPU for FY16e/FY17e, which is 4%/9% lower than consensus expectations of 6.9/7.0 cents.
- We believe that consensus has not fully factored in the trend of GBP, AUD and MYR depreciating relative to SGD.
Mapletree Industrial Trust – DPU growth from pipeline of build-to-suit (BTS) and asset enhancement initiative (AEI) projects.
- We maintain our "Neutral" rating from our results report on 27 July.
- Price has appreciated c.11% post-Brexit and valuations appear stretched at 1.3x P/NAV.
- Hewlett-Packard BTS expected to contribute c.10% of portfolio GRI (Phase 1: 4Q 2016, Phase 2: 2Q 2017) and Kallang Basin 4 Cluster AEI due to be completed 1Q 2018.
- Our analysis suggests that Factory spaces will be hardest hit in 2H 2016; c.57% by GRI of leases expiring in FY17 come from the Flatted Factories segment.
- We forecast 11.08/11.50 cents DPU for FY17e/FY18e, which is in line with consensus expectations of 11.1/11.7 cents.
Soilbuild Business Space REIT (SBREIT) – Stability from master leases, and negligible vacancy risk for the rest of the year.
- We maintain our "Accumulate" rating from our results report on 14 July.
- No master leases expiring within the next two years; next master lease expiry will be for Solaris (23% of portfolio by GRI) in August 2018.
- Negative catalyst: Default by tenant at 72 Loyang Way (Technics Offshore); may not be able to fully lease out property to multiple tenants.
- Positive catalyst: announced acquisition of Bukit Batok Connection that is subject to Unitholder approval.
- We forecast 6.11/5.99 cents DPU for FY16e/FY17e; this is 1%/6% lower than consensus expectations of 6.2/6.4 cents.
Richard Leow CFTe
Phillip Securities
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http://www.poems.com.sg/
2016-08-12
Phillip Securities
SGX Stock
Analyst Report
