• Maintain Equal Weight view on Industrial REITs sub-sector
• Marginal QoQ improvement in sector occupancy, while Rental Index is lower QoQ.
• Rental Index across the board yet to bottom, but Business Park rental made new high
• Tapering of new supply in 2018 is a tailwind for the sector, but absorption of vacant space is still slow
• History being made with the first industrial REIT acquisition of VIT by ESR-REIT

What is the news?

• JTC released its Quarterly Market Report of Industrial Properties for 1Q 2018.

Key takeaways from the quarter

+ Some positive sentiment during the quarter

One manager commented that signing rents during the quarter were higher compared to 6-9 months ago on a same-asset basis. Examples of trade sectors where demand is coming from are Precision Engineering, Electrical and Machinery Products, Transport and Storage and Biomedical.

+ Slight tightening of capitalisation rates

Four of the industrial REITs announced their full year results for FY18 ended-March. Property capitalisation rates have remained stable, with a slight tightening for the larger market capitalised REITs of Ascendas REIT (A-REIT), Mapletree Industrial Trust (MINT) and Mapletree Logistics Trust (MLT). All three of them enjoyed fair value gains on their investment property asset.

– A mixed bag of manager expectations for 2018

Optimism is for Business Park and Hi-Tech/Hi-Specs properties, while caution for standard industrial space and warehouse space.

– Rental reversions generally negative; managers expect rents to bottom in 2018

Industrial S-REITs generally reported negative renewal rates. Even bellwethers A-REIT and MINT reported -6.8% and -2.2% reversions respectively, on their Singapore portfolios for the quarter. Our view remains unchanged for negative reversions to persist in 2018, and we believe rents to bottom only by the end of 2018.

Major events

• Acquisition of VIT by ESR-REIT

After extending the exclusivity period for the proposed acquisition of Viva Industrial Trust (VIT) by ESR-REIT a few times, the acquisition was finally announced on May 18. ESR-REIT will acquire VIT stapled securities for S$0.96/stapled security (26% premium to NAV). The transaction is to be satisfied by 10% cash and 90% through new ESR-REIT units, priced at $0.54/unit.

For illustration, for every 100 VIT Stapled Security held, VIT Stapled Securityholders can expect to receive $9.60 in cash and 160 new ESR-REIT units.

The new enlarged REIT will potentially become the fourth largest industrial S-REIT.

• Large platform acquisition for FLT

Frasers Logistics & Industrial Trust (FLT) is acquiring a platform of 17 properties in Germany and 4 properties in the Netherlands from its Sponsor for €597mn (~A$949mn), growing total portfolio value to A$2.9bn. An EGM has been convened, with Unitholders giving approval for the acquisition, and for the manager to issue new units. Financing of the acquisition will be through a combination of Private Placement, Preferential Offering and debt.

• And MLT has a large platform acquisition as well

Mapletree Logistics Trust (MLT) is acquiring a 50% interest in 11 warehouses located in China from its Sponsor for RMB1,022mn (~S$213mn), growing total portfolio value to S$6.8bn. MLT’s Sponsor will be the sole investor of the other 50% interest. An EGM will be convened on May 24 to seek Unitholders’ approval for the acquisition. Financing will be through Equity Fund Raising and debt.

• Manager of SSREIT managed to get the general mandate back

At the recent shareholders’ annual general meeting (AGM), 55.72% of the votes cast were “For” the resolution authorising the manager to issue Units and to make or grant convertible instruments. With the general mandate, the manager of Sabana Shari’ah Industrial REIT (SSREIT) can collect fees in units instead of cash. The retained cash can then be used to fund the manager’s rejuvenation strategy of making AEIs on core assets.

• Tellus Marine defaulted at SBREIT’s property

Tellus Marine had unpaid rent at Soilbuild REIT’s (SBREIT’s) property at 39 Senoko Way. As at the end of 2017, the tenant had defaulted on about five months and the manager made the decision to terminate the lease. The manager has been able to backfill the property to 34% and with the 18 months security deposit that it holds, expects to be able to maintain the property’s NPI “as if the master lease is still in place for the substantial part of FY2018”.

Investment Actions

We maintain our “Equal Weight” view on the Industrial sub-sector.

The tailwind for the sector is the tapering of supply of Industrial space in 2018. We believe rents to find a bottom by the end of the year; and negative reversions persisting, in view of the higher Rental Index from three years ago. We would like to see a broad-based improvement in occupancy, in order to upgrade our sector view for Industrial REITs.