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