Challenging environment prompts industrial REITs to buy offshore assets
New regulations make acquisition yields 8-10% lower and less accretive for industrial REITs.
All industrial REITs are seeking offshore assets in locations such as Malaysia, Australia, China and Indonesia. We prefer industrial REITs with internal redevelopment potential (AAREIT and MINT) and strong rent reversions (AREIT and CREIT) rather than acquisition ambitions.
We expect factory and warehouse rents to fall 3% p.a. in 2013-14, compared to our previous forecast of a 6-8% p.a. decline.
Upgrade MINT to Outperform; MINT and CREIT are our top industrial SREIT picks.
Acquisitions and developments in Singapore are increasingly challenging: Our checks with industrial landlords and consultants over the past month indicate that new regulations have made acquisitions challenging. From January 2013, REITs buying industrial assets have been required to pay the land premium upfront, making acquisition yields 8-10% lower and less accretive. From June 2012, all sites sold by the state for industrial use have land leases of only 30 years, making new investments less attractive. YTD, only one third-party industrial asset in Singapore has been bought by a REIT. All the SREITs we spoke to are seeking offshore assets in locations such as Malaysia, Australia, China and Indonesia. Singapore capital values are high, having risen by 50% over the past two years compared to rental growth of 18%. We have assumed the least potential upside from acquisitions for AAREIT and MINT.
Prefer industrial REITs with internal redevelopment potential and rental reversions: We estimate that AAREIT and MINT have the highest potential for asset enhancement and redevelopment. We expect rental reversions to be stronger for AREIT and CREIT, due to under-renting: 40% of AREIT’s assets are business parks, where we expect rents to rise 9% p.a. in 2014-15 in tandem with a recovery in prime office rents.
Raise our 2013-14 industrial rent forecasts by 6-9%: Industrial rents have been flat YTD, as the high supply has been matched by strong demand. We now expect industrial and warehouse rents to fall 3% p.a. in 2013-14 (we previously assumed a 6-8% decline p.a.). We expect multi-tenanted factory supply to rise by 3.6% p.a. in 2013-15, similar to the 3.7% p.a. in 2011-12. Strata-titled factory units might not depress general industrial rents if industrialists find the premises unusable. Ninety percent of the warehouses completing in 2013-15 are directly allocated to end-users and should be 70% owner-occupied.
Upgrade MINT to Outperform; adjust price targets by -6% to 3%: We adjust our price targets to reflect a higher risk-free rate of 3.25% (previously 2.75%), our 6-9% higher industrial rent forecasts, and a review of potential acquisition and redevelopment opportunities. Our top picks among industrial REITs are MINT and CREIT.
Publish date: 30/07/13