Industrial REITs – DBSV

When the going gets tough, the tough gets going

• Industrial sector to see moderating growth

• Industrial REITs’ long WALE and well diversified portfolio minimize impact on unitholders’ distributions

• Prefer REITs with exposure to the logistics sector – Cache (TP S$1.11) and MLT (TP S$1.07)

No longer a rosy picture. Industrial rents and capital values performed strongly in 2011, with the URA’s reported Multi-User and Warehouse price and rental indices rising by between 16-22% and are currently at multi-year highs. Looking ahead, moderating global PMI figures and slowing manufacturing growth are expected to put a cap on further rental growth, as tenants rationalize their space requirements as production levels fall to below optimal capacity.

Prefer logistics space; rental downside in the multi-user factory, business parks space. We remain optimistic on the outlook of logistics space, which we expect to be most resilient given its limited competitive supply coupled with the fact that demand for warehousing space has historically been the most sticky. The multi-user factory space could see downside due to excess supply entering the market, capping landlords’ ability to continue raising rents. The Business Park space, often seen as an alternative to CBD offices, should see softening rentals due to lower sector occupancy coupled with weakening CBD office rents, and an the influx of new supply in the decentralized office space.

Industrial REITs well diversified and ready to weather the slowdown. Industrial REITs enjoy lower earnings volatility, supported by long term leases for a portion of their portfolios, resulting in longer weighted average lease expiry (WALE), while a diversified tenant portfolio in a myriad variety of trade sectors translates to lower concentration risks. Even after taking into account more moderate rental expectations, impact on S-REITs’ FY12-13F distributions are limited at -0.5-1.7% on our estimates.

Picks: MLT, Cache.
We prefer stocks in the logistics real estate space which should see lower earnings risks. MLT (BUY, TP S$1.07) and Cache (BUY, TP S$1.11) are attractive given their higher than peer average yields of close to 8.0% – 9.0%