A-REIT : UOBKH

Quasi-Office Play

Ascendas Real Estate Investment Trust (A-REIT) is our top pick in the industrial segment in view of its quasi-office play. With industrial rents being significantly lower than office rents, A-REIT’s high-growth assets (business parks and hi-tech industrial space) are quality alternative solutions for limited office space.

Key beneficiary of strong spillover from office demand. A-REIT’s portfolio, with business & science parks making up 20.1% and hi-tech industrial space 24.2%, is valued at more than S$1.4b. This makes A-REIT a key beneficiary of the spillover from office demand for the next 2-3 years. Also, most leases in the business & science parks (73.9%) and hi-tech industrial (64.6%) segments are on a short-term basis, so A-REIT can ride on the upward rental reversions.

Acquisitions still the key driver. A-REIT’s aggressive acquisition trail will be the key growth driver. A-REIT is on track to reach its target of S$5b worth of investment properties by end-2010. Although management plans to focus on the domestic market in the short term, it can also tap on parent Ascendas’ operational experience in India and China for overseas exposure in the longer term. A-REIT will be a likely exit option for properties under the various funds in which Ascendas has a stake, including Ascendas India Development Trust and Ascendas India IT Parks Fund. Management estimates every S$100m worth of acquisitions at the current capitalisation rates would translate into a 10-cent rise in DPU.

Development projects to lift yields. In 2006, A-REIT pioneered two warehouse-retail developments: Courts Megastore and Giant Hypermart. Such development projects could lift yields by 1.5-2% and double the DPU of acquisition projects, although with a longer time lag. The company is also undertaking other development projects, namely HansaPoint @ Changi Business Park, Zuellig Pharma and Goldin.

Re-iterate BUY, revised target price: S$3.13. Based on our new WACC assumptions, we re-iterate BUY and revise our target price from the previous S$2.87 to S$3.13, implying an upside of 11.1% and total return of 17.6%. Other earnings surprises could come from asset-enhancement activities to maximise plot ratio and occupancy rate improvements.