What is the news?
JTC recently released its Quarterly Market Report of Industrial Properties for 1Q 2017.
Key takeaways from the quarter
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.
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
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
Mapletree Industrial Trust (MINT) – Growth from Hi-Tech Buildings
Soilbuild Business Space REIT (SBREIT) – Drag from weaker than expected take-up rate at Loyang Way property
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