What is the news?
Key takeaways from the quarter
Similar to the previous quarter, managers generally gave feedback that they are seeing more enquires compared to a year ago. However, it is still taking time for enquiries to convert into actual transactions. Managers are still actively engaging tenants to maintain occupancy and it is a tenants market. Demand is coming from trade sectors such as precision engineering, cyber-security, software and bio-medical devices.
In this quarter, rental reversions were still skewed negatively and ranged between -21% (AIMS AMP Capital Industrial REIT (AA-REIT)) and +3.1% (Ascendas REIT (A-REIT), Singapore portfolio). Mapletree Industrial Trust managed +2.8% on renewals. With the improved sentiment on the ground, managers are paying attention to absorption of supply in 2018. Our view for negative reversions to persist in the near-term remains unchanged from previous quarter, and we believe rents to bottom only by the end of 2018.
With multiple tenant defaults, we think that Sabana Shari’ah Compliant REIT (SSREIT) and Soildbuild Business Space REIT (SBREIT) would be most at risk in terms of downward portfolio revaluations at the end of the year.
The master tenants at 1 Tuas Avenue 4 and 6 Woodlands Loop in the SSREIT portfolio have defaulted on rent payment. The property values of these two properties will likely be negatively impacted by the impaired income visibility.
Over at SBREIT, the tenant at 2 Pioneer Sector 1 (NK Ingredients) had defaulted and is no longer able to furnish an insurance guarantee, while the tenant at 61 & 71 Tuas Bay Drive (KTL Offshore) is currently in arrears. These are the two sources of downside risk for portfolio value.
ESR-REIT raised S$150 mn in 4.6% perpetual securities to fund the acquisition of 8 Tuas South Lane. It was a sale and leaseback transaction with Hyflux.
We maintain our “Equal Weight” view on the Industrial sub-sector.
The tailwinds for the sector are the tapering of supply of Industrial space in 2018 and industrial activity for 9M 2017 has been robust. However, occupancy is lower QoQ and YoY in 3Q 2017. The uncertainty is the exact timing of the bottom for rents, but we believe it to be by end-2018. Negative reversions also likely to persist into 2018.
We would like to see sector occupancy to improve, in order to upgrade our sector view for Industrial REITs.
Strategic top-down view (unchanged from previous quarter)
Singapore is evolving towards higher value-added manufacturing and there is a push with the Smart Nation initiative. We like REITs that can capture this opportunity with Business & Science Park properties and Hi-Tech/Hi-Specification buildings.
Key points for the REITs under our coverage
During the recent quarterly reporting cycle, we downgraded MINT to Neutral, as we believe the positive catalysts have been priced in. A-REIT remains our top pick. Despite being Neutral on Keppel DC REIT (KDCREIT) and MINT, we still like them for their portfolio composition exposed to segments with better demand prospects such as Hi-Tech Buildings and data centres. Moreover, both KDCREIT and MINT have relatively low gearing ~30% which affords ample debt headroom for inorganic growth.
Ascendas REIT – The stable giant
Mapletree Industrial Trust – Hi-Tech and beyond by including overseas data centres
Keppel DC REIT – Specific exposure to a unique asset class
Figure 2: Extract from Equinix Inc, 2016 Annual Report
Source: Equinix Inc, 2016 Annual Report
Figure 3: Extract from QTS Realty Trust Inc, 2016 Annual Report
Source: QTS Realty Trust Inc, 2016 Annual Report
Cache Logistics Trust – Ready for the next lap
Soilbuild Business Space REIT – Tenant default woes