DBS Group Research thinks that the Singapore industrial sector will continue to remain resilient even as supply spikes in the sector, leading to a possible downward pressure on rental rates.
Analysts Dale Lai and Derek Tan say that as more new industrial stock in Singapore has been rolled over to FY2023, they see some downward pressure on rentals for the multi-user factories as well as some of the older industrial stock.
They expect a “divergent performance” across the industrial sub-sector, elaborating that the bulk of the new supply over the next two years will come from the single-user factory space which is typically developed for industrialists’ own use.
However, any underutilised space could potentially be leased out to smaller tenants that would otherwise be taking up space at multi-user factories.
As such, Lai and Tan believe that the newer and higher specification multi-user factories will stand out against the older and more generic industrial space as they are able to continue attracting tenants from the precision engineering and high-tech manufacturing sectors.
Lai and Tan highlight that in 3QFY2022, only the business park and warehouse segments recorded an increase in occupancy rates y-o-y despite the increase in stock.
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Furthermore, the warehouse segment recorded the strongest improvements in the rental index, growing by about 6% y-o-y.
The segment with the second highest growth in the rental index was the multi-user factory space with a y-o-y increase of about 5.8%, which we believe is mainly attributed to the high-specification properties.
“Given the economic uncertainties and concerns of a potential economic slowdown, we believe these new economy asset types will once again remain more resilient.”
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As such, they believe that the business park, high-spec, and warehouse segments will continue to be driven by the structural growth of the biomedical, life sciences, and logistics sectors, and they think that REITs with higher exposure to these asset types are expected to outperform again in FY2023.
The analysts also highlight three other areas to watch for the sector, namely, foreign currency exposure, net property income (NPI) margins and overseas acquisitions.
Lai and Tan expect some foreign exchange (FX) volatility for industrial S-REITs, saying as foreign currencies such as the Euro, British pound, Australian dollar and Japanese yen continue to remain weak against the Singapore dollar, industrial S-REITs with larger exposures will see some impact to earnings as their earlier FX hedges roll off.
Industrial S-REITs with their entire portfolios overseas such as Capitland India Trust (CLINT) and Daiwa House Logistics Trust (DHLT) will be the hardest hit, the analysts say.
On the other hand, S-REITs with larger exposures to the Singapore dollar (SGD) and US dollar (USD), including Mapletree Industrial Trust (MINT), Digital Core REIT (DCREIT) and Sabana REIT, will benefit the most.
Separately, the analysts see that NPI margins could also see more volatility as maintenance contracts are renewed at higher costs due to inflation.
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But on the other hand, with most landlords planning to increase service charges to offset inflation in operating costs, margin compression should be mitigated, they say.
Taking these factors into account, Lai and Tan pick Capitaland Ascendas REIT (CLAR), Mapletree Logistics Trust (MLT), and Frasers Logistics& Commercial Trust (FLCT) as their top picks, saying that these are names that have growth prospects despite market volatility and unfavourable conditions such as higher interest rates and low cap rates.
These REITs are expected to benefit from ongoing past acquisitions and development projects that will gradually come online in FY2023 and FY2024, and they also believe these REITs will be one of the first to resume accretive acquisitions given their conducive cost of capital and debt headroom.
Of all the 11 stocks under their coverage, DBS has a “buy” call for 10 of them and a "hold" call for one, namely, Sabana REIT.
