AREIT – CIMB

Fully valued

• Maintain Neutral. The outlook for the industrial market remains poor. Occupancy of AREIT’s sale-and-leaseback buildings is likely to hold at 100%, while that of its multi-tenanted buildings is likely to decline due to downsizing by tenants. However, we expect the fall in occupancy to be moderated by modest rental reversions for the Business & Science Parks and Hi-Tech segments due to a significant gap between passing rents and market rents; as well as development projects completed last year and this year. A-REIT remains one of the most diversified industrial REITs by segment and number of tenants.

• Declining office rents diminish attraction of business park/hi-tech space. More than 50% of A-REIT’s assets by value are business park/hi-tech space. With office rents falling sharply in the last six months, the rental gap between business park/hitech space and prime office space has narrowed sharply, diminishing the attraction of these industrial segments to office users. Although we do not expect an exodus of office users from business park/hi-tech space, we anticipate that asking rents and new take-up will be under pressure.

• DDM-derived target price raised to S$1.68 (from S$1.63). We maintain our estimates but use a lower discount rate of 8.5% (from 8.7%) based on a lower riskfree rate of 4.8% applied across our REIT universe. P/BV for AREIT has risen to 1.0x vs. the sector average of 0.6x, making it the most expensive REIT. At current levels, we believe AREIT is fully valued.