A pivot towards new economy assets have benefited industrial Singapore REITs (S-REITs), which is why DBS Group Research analysts Dale Lai and Derek Tan are positive on the sub-sector.
To be sure, Lai and Tan deem now as a good time to “recycle, redevelop, and reposition” assets to drive returns.
Within the sub-sector, the analysts have identified their top picks as Frasers Logistics and Commercial Trust (FLCT), Mapletree Industrial Trust (MINT), and Keppel DC REIT (KDC REIT).
The analysts have rated all three REITs at “buy” with target prices of $1.85, $3.35 and $3 respectively.
“We continue to like FLCT for its exposure to logistics facilities and business parks in the developed markets Australia and Europe,” say Lai and Tan. “Having already undergone its annual portfolio revaluation exercise which led to a more than $600 million uplift in portfolio valuations, it currently has a sizable debt headroom, which the REIT can tap to fund future acquisitions.”
“KDC REIT is another of our top picks as we forecast a more than 8.5% increase in its FY2022 DPU driven by acquisitions and AEIs completed this year,” they add. This implies a forward FY2022 distribution per unit (DPU) yield of c.4.6%, which is primed as a very attractive yield for a pure-play data centre portfolio.
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“Industrial S-REITs pivot towards new economy assets have paid off as they continue to demonstrate their resilience throughout the Covid-19 pandemic,” say Lai and Tan. “With robust cap rate compression on their books, this has raised net asset values (NAV)s.”
As such, industrial REITs are projected to have “attractive growth prospects” and to report a strong FY2022 DPU growth of around 3.1%, higher than the historical average of around 2.1%, according to the analysts.
According to the analysts, the warehouse and business parks sector look set to outperform expectations in FY2022. “Labour shortage in the construction sector led to delays in completion of new industrial space, pushing deliveries into 2022,” Lai and Tan say. “As such, we anticipate a record 2.2–2.4 million sqft of completion next year, an overhang on growth outlook.”
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Lai and Tan expect to see some new supply rolling over to FY2022 as well. “With only 728,000 sqm of new industrial supply completed year-to-date (y-t-d) 3Q2021, JTC estimates that another 873,000 sqm of new supply could come online in 4Q21,” the analysts say. However, construction delays are likely to persist until next year at least, hence the new supply likely rolling over to FY2022.
A repeat of oversupply however concerns weighs on rental growth prospects. “At the beginning of FY2021, we were concerned with the new supply of industrial space that was projected to come online,” say Lai and Tan. “Although concerns of an oversupply of new industrial space have been allayed in FY2021 due to construction delays, it could potentially pose as a risk for FY2022.”
“Moreover, the strong rebound of the manufacturing sector, expansion of the logistics sector, and stockpiling activities helped drive take-up in FY2021,” they add.
Additionally, industrial REITs are projected to see healthy earnings growth from organic initiatives and acquisitions done over the year. “Having remained resilient throughout the COVID-19 pandemic and ramping up their acquisitions over the past two years, industrial REITs are projected to report a strong growth of more than 6.6% in FY2021,” the analysts say.
The strong rebound in FY2021 is also attributed to the lack of some rental reliefs provided to tenants in FY2020, as well as the reversal of some retained earnings as the new economy assets emerged relatively unscathed, according to Lai and Tan.
