Industrial REITs - Navigating through murky times
■ Industrial landlords to ride out operational challenges well
■ Reversions to remain positive, buffered by low expiring rent levels; retention rates expected to remain high
■ We pick MINT for superior growth profile; Cache for high yields
Challenges ahead given significant supply outlook
The industrial sector performed better than expected in 2013, as demand growth kept up with supply completions. As a result, rental and capital values inched up, albeit at a more moderate rate of 5-7%. Looking ahead, we see outlook turning modest, owing to a significant supply pipeline of 51.8m sqft (+12% supply expansion) of industrial space currently under construction/planning, which is projected to be completed over 4Q2013-2015.
Growing demand and high pre-commitments to limit downside in rents
While supply growth is significant, we believe that earnings downside is mitigated by an estimated c.70% of the space already pre-committed or to be filled given a brighter economic outlook. Demand for space will likely come from firms looking to consolidate or expand operations to a single base, with an aim to improve production efficiency. In addition, firms that invested significantly in capex are also likely to prefer to renew leases. This is expected to limit declines in spot rents to c.3- 5% over 2014-2015, amid a 2-ppt rise in vacancy rates.
Industrial landlords see minimal earnings risks as reversions to remain positive
We expect landlords to be realistic in their rental expectations and thus, retention rates should remain fairly high. Rental reversions are likely to remain positive, buffered by low expiring rents which are estimated to be c.7-15% below market levels. As such, we believe that earnings risk is minimal and forecast industrial REITs to deliver FY13F-15F DPU growth of c.3%.
Acquisition growth to moderate
On the inorganic growth front, competition for assets to remain with eight listed industrial REITs, while recent new policy measures by JTC to tighten selling restrictions for industrialists and REITs meaning that the pool of investable assets will shrink but transactions, if any, will be of stronger asset and tenant quality. Industrial REITs are likely to focus on development or asset enhancement activities to optimize returns.
An eye on growth. Across the industrial REITs, we expect MINT to deliver higher growths of 5% CAGR over FY13-15F (vs secto’s average of 3%) . Cache continues to offer visible and high yields of close to 8.2%-8.5%
Publish date: 19/12/13