SINGAPORE (Aug 22): Phillip Securities Research is keeping its “equal weight” rating on the industrial REITs sub-sector amid prolonged negative reversions.
“Our previous view was for rents to bottom in 2017. We now believe rents to bottom only by the end of 2018,” says analyst Richard Leow in a report on Friday.
Mapletree Industrial Trust (MINT), Soilbuild Business Space REIT, Cache Logistics Trust all reported negative reversions in the last quarter. Excluding the one-off effect from first-cycle renewals at Aperia, Ascendas REIT (A-REIT) would have also posted negative rental reversion for its Singapore portfolio.
“During this season's results briefings, we repeatedly heard Managers caution for negative reversions in 2H 2017,” Leow says. “It is still a tenant's market – tenant retention and maintaining occupancy remains the priority for Managers. This will put pressure on rents.”
According to Leow, the pressure on rents is improving, with the oversupply situation abating. However he notes that occupancy has not picked up, despite an increase in industrial activity in Singapore.
“With the recent run up in prices of the industrial REITs, our view is that positive expectations have been factored in, and there is now a greater probability for disappointment rather than a positive surprise,” Leow says.
But he says buying opportunities still exist.
Leow’s top picks for the sub-sector are A-REIT and MINT, which he says will benefit from Singapore evolving towards higher value-added manufacturing and the Smart Nation initiative through their Business & Science Park properties and hi-tech/hi-specification buildings.
Leow has “accumulate” calls on both A-REIT and MINT, with target prices of $2.86 and $1.98, respectively.
Business Park and hi-specs properties in Singapore account for some 57% of A-REIT’s net property income.
Further, its sponsor has a pipeline of over $1 billion of Business & Science Park properties, which offers growth opportunities.
“A-REIT has a track-record of DPU growth through its portfolio rebalancing strategy and stability through its diversified portfolio,” Leow says, adding that its aggregate leverage of 33.9% is lower than the sector median.
Meanwhile, he says MINT’s aggregate leverage of 29.8% is one of the lowest within the S-REIT universe, giving it the firepower for inorganic growth.
MINT is also growing its hi-tech buildings segment, with the development of a 14-storey hi-tech building at Kallang expected to be completed in 1Q2018 and a 6-storey data centre in western Singapore expected to be completed by the second half of 2018.
As at 4.43pm, units of Ascendas REIT are trading 2 cents higher at $2.67 and units of Mapletree Industrial Trust are trading flat at $1.86.
