Singapore REITs - Maybank Kim Eng 2017-08-03: Industrials Closing In

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S-REITs Singapore Industrial REITs ASCENDAS REAL ESTATE INV TRUST A17U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI AIMS AMP CAP INDUSTRIAL REIT O5RU.SI VIVA INDUSTRIAL TRUST T8B.SI CACHE LOGISTICS TRUST K2LU.SI

Singapore REITs - Industrials Closing In

Sector fundamentals looking to bottom out 

• We update model and sector estimates following Jun-quarter results, as we saw stronger occupancies across the industrial sub-sectors while rental reversions except for business parks remained weak. 
• We expect sector fundamentals to bottom out in 2017, as supply peaks and demand mean reverts, with upside to rents and occupancies as manufacturing growth accelerates. Business parks remains our preferred sub-sector, with better visibility from limited near term supply, and JTC’s development plans supportive of long term fundamentals. 
• AREIT remains our top sector pick.

Business parks, overseas assets key drivers in 2Q17 

• Industrial REITS generally reported in-line results for the Jun-2017 quarter, with some QoQ weakness along with the 0.7% and 1.5% QoQ decline in rents and prices. 
• Amongst the large-caps, Ascendas REIT (AREIT) and Mapletree Logistics Trust (MLT) saw stronger occupancies in Singapore from stabilization in asset conversions, and improving contribution from overseas growth drivers. 
  • MLT saw its Singapore occupancy increase QoQ from 93.9% to 94.6%. The three large cap REITs would have outperformed the sector on their improving occupancies during the quarter.
  • AREIT reported +1.7% rental reversions on the strength of its business parks and Aperia integrated development, at +3.7% and +13.3% respectively, while MLT achieved +6% rental reversion from stronger overseas drivers (Hong Kong, China, Japan and Vietnam), with Singapore at +0.4%.
• The weakest rental reversions were mostly attributed to the smaller REITs, with ESR REIT reporting -18.3% for its portfolio for 2H17. Viva Industrial Trust however delivered strong results, led by post-AEI gains at its Viva BP and successful backfilling at Jackson Square.
• Business expectations in 2Q17 remained positive, with a 4% net weighted balance of firms surveyed by the EDB positive on the manufacturing sector outlook for the six months from Jul 2017 to Dec 2017. This is the fourth consecutive quarter of improvement in business optimism, buoyed by the biomedical manufacturing (+14%), precision engineering (+10%), and electronics (+7%) clusters.
• Leasing transactions for industrial space also rose accordingly, for a fourth consecutive quarter at 5.6% YoY in 2Q17. We expect a further uptick in the coming quarters alongside the rising optimism in business sentiment, which should help strengthen pre-commitment levels for upcoming industrial supply.

Supply tapering, JTC focused on long term industrial needs 

• We expect industrial supply to rise at 5.0%/1.9% YoY in 2017 and 2018 respectively, with 2.5m sqm of new industrial space (as at end-Jun 2017) to be concentrated in warehouses and factories, adding 12.0% and 4.5% to existing stock.
• We believe business park space offers the best visibility, given limited new supply in 2018-19, and steady rise in pre-commitments levels, supported by demand.
• At a recent dialogue, JTC shared openly its longer term plans for new industrial clusters in Jurong, Woodlands and Punggol, which in aggregate adds 600ha to industrial land stock over the next 5-20 years.
• Notably, we see a potential relaxation in policies in enabling land use flexibility, as the JTC pilots its new land use guidelines. These include calibrated adjustments to existing 60-40 rule at the Woodlands North Coast (WNC), and district-level implementation of gross plot-ratio control parameters at the new ‘enterprise district in Punggol, which are aimed to back new growth industries and to support SMEs.
• We expect occupancies and rent for business parks to be well-supported, given the limited supply, which should benefit Ascendas REIT (AREIT), Mapletree Industrial Trust (MINT) and Viva Industrial Trust.

Updating sector estimates, AREIT still our top pick 

• We adjust our sector estimates following the 2Q17 performance, given the stronger-than-expected occupancies, but weaker rental reversions.
• In all, we are still looking for rents to bottom in 2017, and recover in 2018, helped by weaker asset conversion pressures, and positive manufacturing growth momentum.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-08-03

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.900 Same 2.900

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BUY Maintain BUY 1.600 Same 1.600

BUY Maintain BUY 1.000 Same 1.000

HOLD Maintain HOLD 0.950 Same 0.950