Industrial Singapore REITs (S-REITs) are now the plays for the “new economy”, write DBS Group Research analysts Dale Lai and Derek Tan in a sector report on Sept 23.
“Investors have often baulked at the industrial S-REITs’ tight yields of [around] 5.7% (4.5% for large caps) but we believe that this premium is justified,” say the analysts.
“With the sector’s earnings resilience proven during the Covid-19 recession and with economies re-opening, we believe that sector remains on a firm footing to deliver decent growth of more than 3% compound annual growth rate (CAGR) over FY2021-FY2023,” they add.
In the report, Lai and Tan suggest that investors invest alongside structural growth trends within the new economy assets of logistics, data centres and business parks.
The mix, say Lai and Tan, will deliver both growth and capital upside.
See: ESR-REIT to divest 45 Changi South Avenue 2 property for S$11.1 million
Industrial REITs have been actively growing their portfolios in recent years, with over $6.7 billion announced and completed year-to-date (y-t-d), which now contribute close to 90% of assets.
During the onset of the Covid-19 pandemic in March 2020, yield spreads between large-cap and mid-cap industrial REITs peaked at 4.0%.
Since then, the sub-sector have mostly outperformed other sectors, with it being “the most defensive and least impacted by the pandemic”.
The way Lai and Tan see it, industrial REITs will deliver strong growth momentum from FY2022 onwards.
However, returns are looking “increasingly compressed” with competition from funds.
“In the past 10 years, we have seen dividend yields of industrial S-REITs compressing steadily. Between the beginning of 2011 and now, the most significant yield compression was experienced at the end of FY2017. In the first six years of the last decade, industrial S-REITs have been trading at an average yield of [around] 7.2%,” note the analysts.
To this end, REITs’ sponsors’ pipeline and the ability to kick-start greenfield or brownfield developments will be an advantage to any REIT going forward.
“In our estimation, large-cap REITs have a potential pipeline of more than $7.8 billion they could tap on in the near future. Mid-cap REITs have a significantly smaller potential pipeline of $2.6 billion in realisable pipeline they could tap on. In our opinion, this is likely the key reason for the premium valuations of the large-cap industrial REITs,” say the analysts.
Among the S-REITs, Lai and Tan have indicated their preference for Ascendas REIT (A-REIT), Frasers Logistics & Commercial Trust (FLCT) and Mapletree Logistics Trust (MLT).
“In the large-cap REITs space, we prefer FLCT and MLT for their growth potential and access to high-quality new economy assets that are increasingly becoming harder to come by,” they write.
“We also like A-REIT for its diversified exposure to new economy asset plays, coupled with its attractive yields,” they add.
To them, these REITs have a “continued access to pipelines that can potentially grow their assets under management (AUM) by 13% to 40%”.
“[Their] redevelopments to rejuvenate some of their ageing assets will offer added upside to net asset values (NAVs),” they write.
Selected mid-cap industrial REITs such as Ascendas India Trust, ARA LOGOS Logistics Trust (ALLT) and ESR-REIT could also benefit from their sponsors’ pipeline with a lower cost of capital.
Ascendas India Trust has recently invested into a data centre development – deemed a “new economy asset class” – in Mumbai.
“With a surge in demand for data centre space globally, Ascendas India Trust’s entry into the data centre asset class at this opportune time will enable it to grow its portfolio quickly,” write the analysts.
ALLT is another trust that could see “exponential growth” in its portfolio following its share price rally at the start of 2021.
“LOGOS has also been quick in demonstrating its commitment to ALLT since taking over as the REIT’s new Sponsor. Having addressed concerns of a lack of acquisition pipeline ALLT faced previously, we believe that it could be another mid-cap REIT to benefit from robust portfolio growth going forward,” say Lai and Tan.
Finally, ESR-REIT’s improved share price, in addition to its sponsor’s remaining stake in the Australian property fund, could “pave the way for more accretive pipeline acquisitions in the future”.
“Moreover, with its sponsor being one of the largest logistics and industrial developers and fund managers in the region, this could provide ESR-REIT with a multitude of pipeline acquisitions in the future,” say the analysts.
Among the mid-caps, Lai and Tan say they prefer ALLT and ESR-REIT “for their access to new economy assets from sponsor pipelines”.
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Furthermore, both REITs have been included into the FTSE EPRA NAREIT Developed Asia Index on Sept 20, which could be a catalyst to support their “much-improved share prices”.
“With the improvement in their respective weighted average cost of capital (WACC), we believe that conditions are conducive for both REITs to embark on further accretive acquisitions to rival those of their large-cap peers. Moreover, any acquisitions will have an incrementally significant impact to their earnings given their smaller AUM,” say Lai and Tan.
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