UOB Kay Hian analyst Jonathan Koh has kept “overweight” on the Singapore REITs (S-REITs) logistics sub-sector on the back of tailwinds from e-commerce and building resiliency in supply chains.
E-commerce is a key driver of demand as online retail sales require three times the logistics space compared to that of physical retail spaces.
On average, every US$1 billion ($1.34 billion) creates demand for 1m sf of logistics space, says Koh.
Singapore is also an ideal hub for e-commerce, being the world’s largest container transhipment hub.
Changi Airport is the largest air cargo hub in Southeast Asia and the Southwest Pacific.
Singapore was recognised as the top logistics hub in Asia for 10 straight years by the World Bank, notes Koh.
Furthermore, the top 25 logistics players have established a presence in the republic.
According to Temasek Holdings and Google, the e-commerce market in Southeast Asia is projected to expand by a compound annual growth rate (CAGR) of 12.2% and exceed US$200 billion by 2025.
Another positive factor for logistics S-REITs is the need to build resiliency on the back of the US-China trade conflict and Covid-19 pandemic, which have exposed the vulnerabilities of just-in-time supply chains.
“The transition from just-in-time to just-in-case supply chains is expected to increase inventories by 5% to 10%,” he writes in a June 28 report, which will lead to higher demand for logistics space.
Companies will also need to diversify their supplier bases to minimise concentration risks.
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The sub-sector has held up despite the Covid-19 pandemic. Prime logistics rents were up 0.7% q-o-q to $1.39 psf per month in the 1QFY2021.
Occupancy rates on average improved by 2.3 percentage points to 89.8% in the 1QFY2021 after a trough of 87.5% in the 1QFY2020.
To this end, Koh expects prime logistics rents to increase due to tighter vacancies and strong demand.
Of the three logistics S-REITs under UOB Kay Hian’s coverage, Koh prefers Frasers Logistics & Commercial Trust (FLCT) followed by ARA LOGO Logistics Trust.
He has rated them “buy” each with a target price of $1.79 and 89 cents respectively.
Koh has rated Mapletree Logistics Trust (MLT) “hold” with a target price of $2.08.
He has maintained his earnings forecast for all three REITs.
Units in FLCT, ARA LOGO and MLT closed $1.44, 83 cents and $2.05 respectively on June 29, or 1.22 times, 1.44 times and 1.55 times P/NAV respectively, according to UOB Kay Hian’s estimates.
Photo of Mapletree Logistics Trust: Mapletree Logistics Trust
