Singapore Industrial REITs: Sub-sector remains lacklustre and recovery could be delayed August 17, 2018

  • Maintain Equal Weight view on Industrial REITs sub-sector
  • Sector occupancy ticked down QoQ; Rental Index stabilising but inched lower as well
  • Rental in general has yet to bottom, but Business Park was the lone bright spot with its fifth consecutive quarter of higher rental
  • Tapering of new supply in 2018 is a tailwind for the sector, but absorption of vacant space remains slow – evident from occupancy not picking up
  • Manufacturing and export data already moderating, and the outbreak of a full-blown trade war could be the proverbial last straw
  • Slight change to our view from the previous quarter: Now opine that bottoming of rent might be delayed to 2019, instead of by end-2018

What is the news?

JTC released its Quarterly Market Report of Industrial Properties for 2Q 2018.

Key takeaways from the quarter

The Positives

+ Maintained tapering pipeline of space. JTC reports 2.0 million sqm of space expected to come on-stream in 2H2018 and 2019, compared to the historical 3-year average annual supply and demand of 1.7 million sqm and 1.2 million sqm respectively. Examples of trade sectors where demand came from during the quarter were Precision Engineering, Electrical and Machinery Products, and Transport and Storage.

The Negatives

– Occupancy across all segments dipped QoQ. The worst hit were Multiple-User Factory and Business Park – both also lower YoY. The rest of the segments were stable YoY.

– All Industrial Rental was lower, both QoQ and YoY. It was dragged down by Single-User Factory and Warehouse. The Warehouse segment has been particularly weak in recent years, due to oversupply.

– Mostly negative rental reversions reported by the industrial S-REITs. Negative renewal rates were in the single-digit range, with one outlier of ‑21%. A star-performer was Ascendas REIT, which reported weighted average +10.5% reversion on renewals. Managers remain hopeful for rents to bottom by the end of this year.

– We have turned slightly negative from our previous view. Our previous view was for rents to bottom by the end of this year. We now do not discount the possibility for rents to continue downward into 2019, instead of bottoming by end-2018. Our belief stems from the continued weakness in the Industrial Properties statistics from JTC, moderating of manufacturing and export data, and escalating trade tensions.

What would make us turn positive on the industrial sub-sector?

We would want to see evidence of higher rents, led by a broad-based recovery in occupancy. This would signal that demand is actually able to absorb supply.

What would make us turn negative on the industrial sub-sector?

Further moderation of manufacturing and export data into contraction would lead us to downgrade our view on the sub-sector. Re-flooding of excess supply would also make us turn negative.

Investment Action

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. However, negative rental reversions are expected to persist in 2H2018, in varying degrees across the various REIT portfolios. We have also turned slightly negative from our previous view. We now raise the possibility that rents may only bottom in 2019, instead of by end-2018.

Our previous Industrial REITs sector report was published on May 21.

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About the author

Profile photo of Richard Leow

Richard Leow
Research Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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