Singapore Industrial REITs - DBS Research 2020-02-28: Premium Valuations For Safety

Singapore Industrial REITs - DBS Group Research | SGinvestors.io ESR-REIT (SGX:J91U) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) AIMS APAC REIT (SGX:O5RU)

Singapore Industrial REITs - Premium Valuations For Safety

  • Industry metrics hold steady; Business Parks and Warehouses continue to bottom out which validates our view that these sub-sectors will lead the gradual recovery of the sector.
  • COVID-19 impact not a major concern for landlords but a prolonged slowdown in business activity levels would hit consumer-related and e-commerce plays in China / Hong Kong first while most Singapore tenants remain cautious.
  • Acquisitions to be a growth driver in 2020, we project S$1.6-2.0bn worth of deals to be concluded in our estimates, implying an overall AUM expansion rate of up to 6%.
  • While valuations are high at an average of 1.5x P/NAV and at an average market cap weighted yield of 4.5%; we like industrials for its relative stability. Pick Ascendas REIT (SGX:A17U) and rotate to other mid-cap names like AIMS APAC REIT (SGX:O5RU) and ESR-REIT (SGX:J91U).



Key observations

  • Operational metrics improving. Industrial space rental rates have showed signs of bottoming out towards the end of FY19, and we expect to see higher rental rates for specific sub-sectors. The spike in multi-user factory supply in FY20 should put some pressure on occupancy rates and rentals. The warehouse sub-sector has been gradually absorbing the excess supply over the past few years, and we expect to see some positive rental growth in FY20 with lesser new supply and continued demand for warehouse space.
  • Despite the growth in supply of business parks in FY20, most of this new supply has already been pre-committed, while the limited new supply in the One-North, Jurong and Changi districts should support rental growth for the sub-sector in general.
  • Industrial REITs reported a mixed bag of results in 4Q19 with current market conditions favouring the REITs with overseas diversification or those with more exposure to the business parks and high-tech sub-sector in Singapore. Conversion of single-user properties to multi-user space has created a drag on earnings for some of the mid-cap REITs like Cache Logistics Trust (SGX:K2LU) and AIMS APAC REIT (SGX:O5RU), but we believe that performance of these REITs will improve once these conversions are completed. To make the most out of vacancies within the portfolio, several REITs have stepped up their AEI works at older properties to “future proof” them and improve tenant retention rates.


What are we concerned about?

  • COVID-19 impact – supply chain disruptions could hit a selected group of tenants. We understand that most of the managers are not seeing a direct impact from the COVID-19 outbreak for now but feedback from the ground is that tenants are turning cautious given that supply chains have been disrupted, especially for those with operations in China.
  • While there are no material changes in arrears, we remain on the lookout for any stress on this front. We understand that consumer and e-commerce tenants, especially within the logistics players (especially Mapletree Logistics Trust (SGX:M44U)), are feeling the strain of an extended closure in China due to the virus.


Valuations


Large-cap industrial S-REITs are trading at multi-year highs.


Pricing in too much growth, in our view.

  • We believe that investors are pricing in too much growth in valuations, especially thelarger-cap S-REITs. While the low interest rate environment lends support to acquiring for growth, we believe that the abilityto find accretive acquisitions is easier than buying value in the current operating climate. Given that most managers havestrong discipline and governance process, we believe that investors are pricing in more growth in valuations that what the S-REITs can potentially deliver.
  • We have recently downgraded our calls for Keppel DC REIT (SGX:AJBU) and Mapletree Logistics Trust (SGX:M44U) to a HOLD from BUY.
  • See attached PDF report for more details on industrial sector key statistics.






Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-02-28
SGX Stock Analyst Report BUY MAINTAIN BUY 0.590 SAME 0.590
BUY MAINTAIN BUY 3.000 SAME 3.000
BUY MAINTAIN BUY 3.450 SAME 3.450
HOLD MAINTAIN HOLD 0.550 SAME 0.550
BUY MAINTAIN BUY 1.500 SAME 1.500



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