AREIT – UOBKH

Prime beneficiary of migration to suburban office space

Benefitting from positive rental reversion. The renewal rate for business & science parks was S$4.09psf pm in 1QFY09, an increase of 45% yoy. The renewal rate for hitech industrial space in the quarter was S$3.11psf pm, an increase of 35% yoy. The business & science park and hi-tech industrial segments accounted for 30% and 22% of its portfolio by value respectively. A-REIT will benefit from positive rental reversion as business & science parks and hi-tech industrial segments account for 29.9% and 40.1% of leases expiring in FY09 respectively. Existing contract rates are only S$2.30psf pm for business & science parks and S$1.90psf pm for hi-tech industrial space, much lower than current market rates.

Maximising distribution yield through development projects. Ascendas REIT (AREIT) is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park, which is scheduled for completion in phases from 4QFY09 to 3QFY11. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities for its international technology office supporting its consumer businesses, regional processing centres for securities & funds administration and regional technology infrastructure support. Credit Suisse has also taken up a three-year lease for 26,600sf space at HansaPoint@CBP, a seven-storey build-to-suit building completed in Jan 08. Development projects provide yields of 8-9% compared with 6-7% for acquisitions.

A-REIT is the largest industrial REIT in Singapore and is rated A3 with a stable outlook by Moody’s Investors Service. Sponsor Ascendas is a subsidiary of Jurong Town Corporation, the government agency responsible for developing industrial infrastructure to support economic growth. Our target price of S$2.95 is based on a two-stage dividend discount model (required rate of return: 8.5%, growth: 3.2%).