Singapore REITs Industrial sub-sector: Business Parks out, Hi-Tech Buildings in May 8, 2017 1888

  • Both sector-wide rental and occupancy were lower q-o-q and y-o-y
  • Expect sector’s aggregate rental reversions to range at negative high-single-digit to negative low-double-digits in 2017
  • We believe rents could bottom in 2017, but emphasize that negative rental reversions to persist
  • Key change to our view: Switch from Business Park to Hi-Tech Buildings
  • Maintaining “Equal Weight” view on Industrial REITs sub-sector on optimism of bottoming of rents this year, while being cognisant of the over-supply situation that is likely to persist into 2018

What is the news?

JTC recently released its Quarterly Market Report of Industrial Properties for 1Q 2017.

1Key takeaways from the quarter

  • Negative reversions appears to be abating, with some hits and misses

Ascendas REIT (A-REIT) reported a positive weighted average rental reversion of +3.2% for its Singapore portfolio during the quarter. However, logistics & distribution centres in A-REIT’s portfolio had a whopping -18.8% reversion. Keppel DC REIT (KDCREIT) managed to renew a colocation lease in a SGP DC at a marginally higher rate than previous. Soilbuild Business Space REIT (SBREIT) eked out +3.6% reversions on a portfolio weighted average basis (but -6.0% reversion on forward renewals), after a few quarters of negative reversions. Mapletree Industrial Trust (MINT) was a casualty this quarter, reporting a portfolio weighted reversion of -0.2%, weighed down by Stack-Up/Ramp-Up Buildings segment.

  • Key change to our view: Switch from Business Park to Hi-Tech Buildings

We now view Business Park space less favourably, as the rental-gap between conventional Offices is narrowing due to over-supply of Office space. We are recommending to switch from Business Park space to Hi-Tech properties for growth, and maintaining exposure to conventional factory for stability. The Committee on the Future Economy (CFE), outlines manufacturing will continue contributing 20% of gross domestic product (GDP) over the medium term (19.6% in 2016). Hi-Tech properties should benefit from the CFE’s skill-up strategy of moving up the manufacturing value chain. Small and medium enterprises (SMEs) are still the backbone of the manufacturing sector and Flatted Factories (conventional factory) are the bedrock of the manufacturing sector, as it provides affordable accommodation costs to SMEs.

Investment Actions

We are maintaining our “Equal Weight” view on the Industrial sub-sector, on optimism of the bottoming of Industrial rents this year, while being cognisant of the over-supply situation that is likely to persist into 2018. After our out-of-consensus call from our last report (20 February 2017), the Street has noticeably moved in line and turned upbeat on the Industrial sub-sector as well.

2

Cache Logistics Trust (Cache) – High gearing of 43.1% is the key idiosyncratic impediment to inorganic growth

  • “Reduce” rating from our results report on 21 April
  • Limited scope for organic growth in gross revenue due to oversupply, mitigated by only 4.7% expiry by gross rental income in FY17
  • Ongoing rental dispute with Schenker at 51 Alps Avenue remains unresolved
  • Master lease expiry of CWT Commodity Hub in 2018 is a concern with upcoming supply of warehouse space
  • We forecast 6.69/7.00 cents distribution per unit (DPU) for FY17e/FY18e, which is 8%/4% lower than consensus expectation of 7.3/7.3 cents

Keppel DC REIT (KDCREIT) – Expecting 32% year-on-year (y-o-y) higher gross revenue and 7.7% higher DPU in FY17e, driven by two acquisitions completed in FY16 and one in January 2017

  • “Neutral” rating from our results report on 18 April
  • We forecast 6.61/6.04 cents DPU for FY17e/FY18e, which is 8%/18% lower than consensus expectation of 7.2/7.4 cents
  • Our FY18e DPU is lower than FY17e as we have assumed an equity fund raising associated with the acquisition of the mainCubes data centre in 3Q FY18e
  • Resultant FY18e weighted average unit base is 2.8% larger than FY17e

Mapletree Industrial Trust (MINT) – Growth from Hi-Tech Buildings

  • “Neutral” rating from our results report on 26 April
  • Steady addition of Hi-Tech Buildings to portfolio from 13% (4Q FY14) to 25% (4Q FY17) by net property income
  • Hi-Tech Buildings pipeline: (1.) Phase Two of Hewlett-Packard (HP) build-to-suit (BTS) to contribute by 2Q CY17, (2.) 30A Kallang Place asset enhancement initiative (AEI) completing in 1Q CY18 and (3.) recently announced BTS data centre to contribute by 2H CY18
  • Growth potential currently priced in; look to accumulate on temporary price weakness
  • We forecast 11.29/12.00 cents DPU for FY18e/FY19e, which is 4%/3% lower than consensus expectation of 11.8/12.4 cents

Soilbuild Business Space REIT (SBREIT) – Drag from weaker than expected take-up rate at Loyang Way property

  • “Neutral” rating from our results report on 13 April
  • Acquisition of Bukit Batok Connection will help to cushion the negative effect of the Loyang Way vacancy; Loyang Way property size is 5.2% by portfolio value
  • However, DPU will be weighed down by the higher unit base arising from the 1-for-10 Preferential Offering in September 2016
  • We are expecting lower y-o-y DPU in all four quarters of FY17e
  • We forecast 5.34/4.76 cents DPU for FY17e/FY18e; this is 3%/10% lower than consensus expectation of 5.5/5.3 cents

3

4

 

Please sign in to download the full report in PDF.

Important Information

This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.

By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.

This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.

Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.

Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.

To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.

IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE

Where the report contains research analyses or reports from a foreign research house, please note:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

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.

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!