Singapore REITs - Maybank Kim Eng 2018-04-16: Industrials Bottoming Out

Singapore REITs - Maybank Kim Eng 2018-04-16: Industrials Bottoming Out Industrial S-REITs ASCENDAS REAL ESTATE INV TRUST A17U.SI AIMS AMP CAP INDUSTRIAL REIT O5RU.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI MAPLETREE LOGISTICS TRUST M44U.SI CACHE LOGISTICS TRUST K2LU.SI VIVA INDUSTRIAL TRUST T8B.SI

Singapore REITs - Industrials Bottoming Out


Positive sector fundamentals; AREIT best proxy 

  • We remain constructive on industrial REITs, despite the recent pull-back in share prices against a rising interest rate regime. 
  • We see positive earnings momentum led by the large cap names from improving supply and demand, with near-term catalysts rising occupancies and stable/positive rental reversions. 
  • We see limited risks from higher interest rates given the sector’s well-cushioned balance sheets, with potential acquisition growth upside not priced in. 
  • Valuations remain compelling, especially for AREIT and MINT, given their headroom for accretive deals.



Catalysts from lower vacancies, higher rents 

  • Overall industrial leasing activity jumped 35% y-o-y in the first two months of 2018, the strongest since 3Q13 (+27% y-o-y). We expect stronger leasing demand and manufacturing growth, along with a broader recovery in services. This is supported by rising business optimism: a 1% net weighted balance of firms surveyed by the EDB in 4Q17 were positive on the manufacturing sector outlook for the six months from Jan 2018 to Jun 2018, which should help strengthen pre-commitment levels for upcoming supply.
  • Demand for factory space troughed in 2016, following a bottoming in industrial production in 2015, and rose 11.0% y-o-y in 2017. We estimate demand growth of 5% y-o-y in 2018, with a sustained bias towards business parks and high-spec buildings. Recent examples of the latter take-up include the housing of centralized kitchen or R&D functions, and integrated facilities for advanced manufacturing and engineering.
  • Vacancies across all sub-segments decreased together for the first time in 4Q17, led by warehouses, down 1.6% q-o-q to 10.9%. Large cap REITs have continued to deliver stronger occupancies since 3Q16, as asset conversion pressures have subsided, especially for AREIT 
  • We believe industrial rents showed signs of bottoming out in 4Q17 at -0.1%, the slowest decline in 11 quarters. We expect rents to stabilize in 2018 and forecast 1-3% annual growth in 2018-2020, helped by easing supply, with about 9.1m sf in FY18, down from 20.9m sf in 2017, and 8.9m sf until 2020. These are 0.8-1.0% of the total stock in 2018-2020.


Added levers from acquisitions, consolidation theme 

  • We see further overseas diversification among REITs, with the acquired properties lifting overall portfolio fundamentals, by lengthening both WALEs and land tenures. With gearing for industrial REITs averaging 36.7% at end-Dec 2017, we estimate total debt headroom of SGD2.1b and SGD5.1b to support acquisition growth, assumed at the respective 40% and 45% gearing thresholds. 
  • AREIT and MINT are best-placed to deliver on accretive deals, given their clear mandates and substantial debt headroom.
  • Meanwhile, divestment and redevelopment opportunities will be supported by the longer tenure of REIT-held properties, with 50% of their assets exceeding 40 years. This contrasts with 20-year tenures for new government land sale sites.
  • We believe the REITs may stay focused on their ROFR properties, which could expand their NLAs by up to 1.0x (in the case of MLT), while gross development value (GDV) of announced AEI and redevelopment projects could add 9% to their asset base (for AAREIT).
  • Investors are likely awaiting completion of merger discussions between ESR-REIT and Viva Industrial Trust, which could spur further consolidation activity amongst the small-cap names.


Sector well-cushioned, rental upcycle could support tighter yield-spreads 

  • We see little risks from rising rates given strong balance sheets, and limited near term refinancing risks. AREIT’s yield-spread is now 3.8% against the SG 10-year government bond, which could see further tightening given a stronger rental recovery, as evident in earlier episodes (1Q07, 1Q10). 
  • However, this could lead to further rate tightening given a stronger rental recovery, as evident from earlier episodes.







Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-16
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 3.050 Same 3.050
BUY Maintain BUY 1.500 Same 1.500
BUY Maintain BUY 2.20 Up 2.100
HOLD Maintain HOLD 1.250 Same 1.250
HOLD Maintain HOLD 0.900 Same 0.900
BUY Maintain BUY 1.050 Same 1.050



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