Singapore Industrial REITs - OCBC Investment 2018-09-04: Still Active On Acquisition Front

Singapore Industrial REITs - OCBC Investment Research 2018-09-04: Still Active On Acquisition Front Singapore Industrial REITs FRASERS LOGISTICS & IND TRUST SGX:BUOU MAPLETREE LOGISTICS TRUST SGX:M44U

Singapore Industrial REITs - Still Active On Acquisition Front

Industrial rents still down marginally

  • The rental index for all industrial space declined marginally by 0.1% q-o-q in 2Q18, according to data from JTC. This was the third consecutive quarter whereby rents fell 0.1% q-o-q. There were contrasting performances within the industrial space: 
    • Business parks continued its positive growth, with rents improving 0.5% q-o-q, but this was at a smaller magnitude as compared to the preceding two quarters; 
    • rents for Multiple User Factory rose 0.2% q-o-q, while rents remained weak for Single User Factory (-1.6%) and Multiple User Warehouse (-0.5%).
  • Leading indicators such as the Singapore Purchasing Managers’ Index (PMI) remained in expansionary mode. Although the manufacturing PMI moderated from Apr to Jul this year, an increase was registered for the month of Aug (+0.3 m-o-m to 52.6).

Supply pressures to taper further in 2019

  • In terms of supply, after 302k sqm of industrial space had come onstream in 1H18, an estimated 2.0m sqm of industrial space is expected to enter the market in 2H18 and 2019, representing ~4% of current stock, according to JTC. 
  • To put things in perspective, over the past three years, the average annual demand and supply were 1.2m sqm and 1.7m sqm, respectively. For the multiple-user factory space, ~334k sqm of supply is expected to come into the market in 2H18 and 2019, versus an annual demand and supply of 298k and 400k sqm over the past three years, respectively.

~ SGinvestors.io ~ Where SG investors share

Stronger rental reversions for the larger industrial REITs

  • Judging from the 2Q18 performances of industrial REITs, we note that the larger industrial REITs continued to deliver stronger rental reversions than the small-to-mid caps. Ascendas REIT had a robust rental uplift of 10.5% in Singapore in 1QFY19. This was boosted by the renewal of a 15-year lease at a Hi-Specifications property which was previously under-rented. Excluding this lease, rental reversions were still positive at ~3%. 
  • On the other hand, Soilbuild REIT recorded negative rental reversions of 11.9% (-9.7% for renewal/forward renewal leases and -16.4% for new leases), while AIMS AMP Capital Industrial REIT had negative rental reversions of 8.0% for its renewal leases in 1QFY19.
  • Regarding the proposed merger of ESR-REIT and Viva Industrial Trust (VIT), it was announced that all resolutions pertaining to the proposed merger were approved by ESR-REIT & VIT unitholders last week at their respective EGMs. Following the approval, VIT Managers will be submitting its application to the Court. As a recap, should this pan out successfully, we believe the enlarged entity would likely be able to reap the benefits of refinancing its debt at lower costs and increasing its bargaining power among tenants and brokers, while also setting the stage for further potential consolidation in the industry.
  • Our preferred industrial REITs are Frasers Logistics & Industrial Trust [Rating: BUY; Fair Value: S$1.18] and Mapletree Logistics Trust [Rating: BUY; Fair Value: S$1.34]

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2018-09-04
SGX Stock Analyst Report BUY Maintain BUY 1.180 Same 1.180
BUY Maintain BUY 1.340 Same 1.340