Singapore Industrial REITs - DBS Research 2020-06-02: Industrial Sector – Reaching Former Highs


Singapore Industrial REITs - Industrial Sector – Reaching Former Highs

  • Industry metrics remain steady; manufacturing sector among the first economic sectors to emerge out of the current recession come 2021.
  • Government measures are holistic; infusing liquidity and cashflows for businesses, cash grants to support SME tenants will further help to cushion the impact of a slower than expected recovery.
  • Acquisitions a driver for growth in 2020 and 2021, we have factored into our estimates S$1.6bn-S$2.0bn worth of deals to be concluded closer to the end of respective financial years.
  • The sector is trading at 1.5x P/NAV and average market cap weighted yield of 4.5%; prefer Ascendas REIT (SGX:A17U), Frasers Logistics & Commercial Trust (SGX:BUOU) and mid cap names like AIMS APAC REIT (SGX:O5RU) with conservative gearing ratios.

Key observations

Operational metrics remain healthy.

  • Overall industrial metrics have been stable with occupancies resilient across major industrial subsectors. While the Circuit Breaker during April-May 2020 has resulted in landlords making provisions for rental deferments to assist tenants in their cashflow needs, the impact is marginal at c.2%-7% of portfolio rental revenue.
  • Impact to industrial tenants have been more contained as majority of them are operating as they are considered part of essential services that were exempted from the shutdown. Moreover, property tax rebates from the government will be fully passed on to tenants as a form of rental relief.
  • With the gradual re-opening of the economy over three phases from June 2020 onwards, we believe the manufacturing sector will be the fastest to recover post COVID-19, riding on the back of a recovery in the global economies from 2021 onwards.

Various government assistance programmes is positive for the sector.

  • The government has been quick to infuse impacted businesses with liquidity (access to loans), subsidies under the Jobs Support Scheme (JSS), and various grants to support cashflows for small medium enterprises (SMEs), which is the lifeblood of the manufacturing sector.
  • While landlords may have to cough up c.1 month of rental rebates to their SME tenants, the downside risks to earnings is likely one-off. We prefer S-REITs with exposure to sub-sectors that will benefit from structural changes in the economy such as business parks, logistics and data-centres.
  • Our picks are Ascendas REIT (SGX:A17U), Frasers Logistics & Commercial Trust (SGX:BUOU) and AIMS APAC REIT (SGX:O5RU).

What are we watching?

Watching rent arrears.

  • Selected industrial REITs with Singaporecentric exposures have retained some income in 1Q20 to meet demand for further potential rent deferments and rebates. Amid structural changes in the economy, we note minimal deterioration in arrears ratios for now, but are mindful of any potential weakness in the medium term.

Balance sheet recapitalisation risk.

  • Gearing ratios range between 34 - 42% for the sector, but cashflows may be impacted in the near term. A worse than anticipated drop in cashflows could lead to lower asset values. A potential drop of 15% in asset values may see most of the S-REITS, especially the mid cap names, looking to recapitalise their balance sheets to keep gearing within 40%.

Key Observations & Driver of DPU


  • Rental contribution from 3 Tuas Ave 2 commenced on 1 March 2020.
  • Gearing improved marginally to 34.8%, all borrowings due this year have been fully committed to be refinanced.
  • Retained S$2.9m of distributable income.

Ascendas India Trust (SGX:CY6U)

  • COVID-19 disruption anticipated across portfolio; manager believes a protracted impact may shift its development completion timelines.
  • Portfolio remains substantially committed at 99%; rental reversions should remain positive; retention rate is high.
  • Ample liquidity to finance its operations, debt obligations and dividends.

Ascendas REIT (SGX:A17U)

  • Portfolio occupancy improved 0.8ppts q-o-q to 91.7%.
  • Ascendas REIT reported positive rental reversion of 8.0% for its portfolio.
  • Minimal provisions for F&B and retail tenant rebates; income retention not necessary at this juncture.

ARA LOGOS Logistics Trust (SGX:K2LU)

  • Cache Logistics Trust has changed its name to ARA LOGOS Logistics Trust to reflect combined capabilities from its partnership LOGOS.
  • Majority of leases expiring in FY20 have been renewed; only 8.1% of expiries remain for the year.
  • Retained 20% of distributable income.


  • Retained S$7m in distributable income as a provision for rental rebates and deferment.
  • Moderation to FY20 organic growth due to suspension of AEI and redevelopment plans amid the COVID-19 pandemic.
  • F&B and ancillary services tenants make up about 7.5% of portfolio and have been the most affected by the Circuit Breaker shutdown measures.

Mapletree Industrial Trust (SGX:ME8U)

  • FY20 DPU in line; retention of S$6.6m (S$0.03 per share) for cashflow flexibility.
  • Diversity in tenant profile will prove to be key in delivering resilience in midst of an economic downturn and COVID-19 disruption.
  • Well-timed acquisition of USA data-centers to pull numbers up in FY21F.

Mapletree Logistics Trust (SGX:M44U)

  • Seeing emerging cautiousness among 10% of its tenants due to impact from COVID-19, but majority of tenants are seeing growing volumes.
  • Payout ratio in FY21F assumed at 100%; however, a reduction likely if outlook remains downbeat by 2H20.
  • Acquisitions to drive earnings but likely backend loaded.

Soilbuild REIT (SGX:SV3U)

  • Achieved 3.9% higher rents for new leases signed in the quarter.
  • Negative rental reversion of 14.6% recorded for lease renewals, largely from Beng Kuang Marine’s lease that was renewed for three years.
  • Retained S$0.8m in capital distributions.

Frasers Logistics & Commercial Trust (SGX:BUOU)

  • Frasers Logistics & Industrial Trust renamed to Frasers Logistics & Commercial Trust following the completion of its merger with Frasers Commercial Trust.
  • Three leases signed in Australia and Germany, maintaining portfolio occupancy at 100%.
  • Working closely with tenants to provide relief measures for those who genuinely need assistance.


  • Gearing increased 1.5% q-o-q to 32.2% due mainly to additional debt taken to acquire the remaining 999-year leasehold land interest at Dublin 1.
  • Minimal impact on operations even with the extension of Circuit Breaker measures in Singapore as data centres are considered essential services.
  • Acquisitions for FY20 may face some delays due to global lockdown and disruption.


Large cap industrial S-RETIs are trading at wide premiums to mid-cap REITs.

  • With the ongoing COVID-19 pandemic, we favour the industrial subsector over other subsectors for its relative resilience in times of uncertainty and economic slowdown. Since falling to their multi-year lows in March 2020, the industrial REITs have rebounded with some of them trading close to levels seen in late 2019.
  • The larger cap industrial REITs (Ascendas REIT (SGX:A17U), Mapletree Logistics Trust (SGX:M44U), Frasers Logistics & Commercial Trust (SGX:BUOU) and Keppel DC REIT (SGX:AJBU)) are trading at an average of 1.51x P/NAV, while the other mid-cap REITs are trading at 0.89x P/NAV.
  • The distinction between the large cap and mid cap S-REITs are now at the widest that we have seen as investors focus on the larger names for their liqudity, scale and ability to deliver stable earnings amid current market uncertainties.

Industrial REITs with overseas exposure favoured.

  • Most REITs have guided that AEI and acquisitions plans in FY20 are put on hold amid the COVID-19 pandemic and uncertain economic landscape. Focus for the rest of the year will be on organic growth and managing expiring leases to maintain healthy occupancy rates.
  • With the Circuit Breaker measures and Temporary Measures Act, landlords with mainly Singapore exposure will likely be the most impacted by tenant requests for rent reliefs and deferrals. As such, REITs with overseas industrial properties should perform better compared to those with mostly Singapore assets.

FY20F earnings moderated to take into account COVID-19 pandemic and economic uncertainty.

  • On average, we have revised our FY20F earnings lower by assuming that rental rates would decline by 3-5% and occupancy rates to compress by up to 5%. However, selected asset types such as data centres and business parks should should remain resilient and hold up well due to market fundamentals and and controlled supply.

Derek TAN DBS Group Research | Dale LAI DBS Research | DBS Research | https://www.dbsvickers.com/ 2020-06-02
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