AREIT – UOBKH

Proposed JTC REIT aborted

Risk of direct competition with JTC REIT averted. JTC announced that it would divest a portfolio of high-rise ready-built properties to Mapletree Investments for a total consideration of S$1.7b. The properties comprise 39 blocks of flatted factories, 12 amenity centres, six stack-up and one ramp-up buildings, three multi-tenanted business park buildings and one warehouse building. Mapletree Investments was previously appointed to establish and manage a proposed JTC REIT, which will acquire these properties from JTC. JTC decided not to proceed with the JTC REIT as its REIT financial advisors, DBS Bank, Goldman Sachs and UBS, have advised that current volatile market conditions are not conducive for a REIT IPO.

We view the aborted JTC REIT positively as it prevents unhealthy competition between two industrial REIT under the ambit of JTC. The transfer of these properties to a private trust sponsored by Mapletree Investments is expected to complete by Jul 08. Mapletree will then explore the possibility to list the portfolio as a REIT, possibly in combination with its other industrial assets. Mapletree could list the assets under a separate REIT or inject the assets into Mapletree Logistics Trust. Both scenarios are more palatable compared to having direct competition with a sister REIT with similar investment mandate.

Positive rental reversion for Science & Business Park and Hi-Tech Industrial space. A-REIT benefits from the shortage of office space within the Central Business District (CBD). This has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Alexandra Technopark and Changi Business Park (CBP). There is also positive impact from inflow multinational companies expanding in Singapore. AREIT has renewed and signed new leases for total net lettable area (NLA) of 784,925sf during 4QFY08, representing 9.7% of NLA for multi-tenanted buildings. Gross rental rates for these new contracts for Science & Business Parks and Hi-Tech Industrial were S$3.76 and S$3.10psf pm respectively, 68.8% and 49.8% higher on a yoy basis.

Maintain BUY. A-REIT provides FY08 distribution yield of 6.32%, a healthy spread of 3.97% over 10-year Singapore government bond yield at 2.35%. Our target price is S$3.00 based on two-stage dividend discount model.