Industrial REITs – OCBC

Sanguine outlook; maintain OVERWEIGHT

Increasing rentals. Singapore’s industrial property market closed the year on a positive note, with 4Q10 rental values experiencing their fastest pace of growth since recovery. According to Colliers International, average monthly gross rents of factories and warehouses rose by 4.1%-5.0% QoQ, the fastest pace of growth since their recovery a year ago. YoY, rentals grew by a healthy 8.1%-11.9%. There was also increased demand for business parks and high-specs industrial space. Companies that are not sensitive to CBD locations are increasingly looking at high-specs space as office alternatives because of rental savings as well as the narrowing gap in terms of offerings between the two spaces.

Acquisition spree continuing. In 4Q10, we also witnessed the acquisition spree continuing from early quarters, with the economy awash with liquidity and low interest rates. MLT acquired three more properties in Singapore at a total consideration of S$85.6m. A-REIT made its foray into Shanghai with the forward-purchase of a Jinqiao business space property at S$117.6m. AAREIT also completed its acquisition of 27 Penjuru Lane at S$161m and recently announced the acquisition of Northtech (S$72m) in Feb 2011. CIT completed its acquisition of 1 & 2 Changi North Street 2 and 511 & 513 Yishun Industrial Park A. These acquisitions were in line with the manufacturing sector growing at a brisk pace. Manufacturing output increased 10.5% YoY in Jan 2011, while PMI was 50.5-52.3 from Oct 2010-Feb 2011, which indicated an expanding manufacturing sector for the fifth straight month.

Singapore Land Acquisition Act. The last quarter also saw some REITs affected by SLA’s compulsory land acquisition for the construction of the Tuas West MRT extension and road works along PIE. CIT has three properties affected to varying degrees by the acquisition, which will be possessed by the government by Jan 2013, affecting 58,439 sqm (12.8% of portfolio) of total land area. Sabana REIT’s property at 1 Tuas Avenue 4 is also affected, with 691.7sqm (5.04% of total land area of property) to be possessed by the government by 25 Nov 2011. Both REITs are entitled to receive compensation based on the market value of the acquired land.

Sanguine Outlook. The outlook for industrial segment remains sanguine on the back of strong economic fundamentals, as well as the government’s continued commitment to stimulate growth in the manufacturing sector. Demand for high-specs space is expected to trend upwards as companies move up the value chain from manufacturing and assembly activities to innovation-related development works. At 1.04x P/B versus a historical P/B of 1.10x, valuations remain compelling. Maintain OVERWEIGHT for the industrial-REITs subsector.