Wednesday, December 18, 2013

Industrial REITS: Downside risks lurking (OCBC)

Industrial REITs continued to turn in firm results in 3Q13. However, subsector portfolio occupancy encountered a marked sequential decline of 2.9ppt to 94.8%. For 2014, we are keeping our cautious view on the industrial REIT subsector, as we believe industrial rents may stay relatively flat amid the influx of industrial supply and scale back in leasing enquiries for factory space. We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive. Nevertheless, more industrial REITs are turning to asset enhancement initiatives/(re)developments to grow their income, and this should help to cushion the moderating growth trend. We are maintaining our NEUTRAL view on the industrial REIT subsector. We choose Ascendas REIT [BUY, S$2.45 FV] and Cache Logistics Trust [BUY, S$1.30 FV] as our preferred picks due to their strong earnings visibility, robust financial position and compelling yields.


Firm 3Q13 results, with some positive surprises
Industrial REITs continued to turn in firm results in 3Q13, still benefiting from higher rents and contribution from completed acquisitions and development projects. Ascendas REIT and Soilbuild REIT surprised with better-than-expected results. However, subsector DPU growth was rather modest at 4.3%, partially impacted by divestments and a larger unit base.

Subsector occupancy saw a marked decline
Leasing activity was healthy in 3Q, with positive rental reversions still achieved by some of the industrial landlords. However, subsector portfolio occupancy encountered a marked sequential decline of 2.9ppt to 94.8%. Looking ahead, we believe portfolio occupancies at some of the REITs may continue to face downward pressures, as a number of REITs have guided for non-renewal of tenants and conversion of master leases/single-user asset into multi-tenancies.

Rental market likely muted in 2014
For 2014, we are keeping our cautious view on the industrial REIT subsector. The rental market has essentially been on an uptrend since the trough in 3Q09. However, we are skeptical of the sustainability of the growth momentum in the factory and warehouse market. Leasing enquiries for factory space has tapered, according to property consultant CBRE. The influx of factory and warehouse supply from 2013-2016 is also expected to cap the growth in rents or even exert downward pressures in our view. On a more positive note, demand for business park space has held steady in 3Q13 and is likely to remain positive in the short to medium term, with potential upside in the rents over the next 6-12 months. We maintain our view that the industrial property rents, on the whole, will remain stable in 2013, while rents in 2014 may likely be flat to slightly downside biased.

Increasingly difficult to find yield-accretive properties
We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive. Singapore warehouse and factory prices have recently witnessed yet another set of record highs in 3Q13. Furthermore, the Singapore government has been imposing a number of cooling measures over the year. All these developments serve to dampen the market sentiment and transaction activity in our view, as industrial REITs are likely to be more selective on their acquisition targets.

Maintaining our cautious stance
With the potential reduction of the US stimulus programme and accompanying hike in cost of debt funding, we believe earnings accretion from investments may also be eroded, while the existing portfolio assets may be susceptible to devaluation. Nevertheless, more industrial REITs are turning to asset enhancement initiatives/(re)developments to grow their income, and this should help to cushion the moderating growth trend. We are maintaining our NEUTRAL view on the industrial REIT subsector. We choose Ascendas REIT [BUY, S$2.45 FV] and Cache Logistics Trust [BUY, S$1.30 FV] as our preferred picks due to their strong earnings visibility, robust financial position and compelling yields.


Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 11/12/13

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