Singapore REITs Industrial sub-sector: Business Parks out, Hi-Tech Buildings in May 8, 2017 1764

  • 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.


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




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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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