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Sabana Industrial REIT provides shelter from volatility and reigns as the top performer in total unitholder returns

The Edge Singapore
The Edge Singapore11/10/2022 11:15 AM GMT+08  • 9 min read
Sabana Industrial REIT provides shelter from volatility and reigns as the top performer in total unitholder returns
Han's two priorities were to ramp up occupancy and stabilise the REIT / Photo: Samuel Isaac Chua
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Sabana Industrial REIT has a diversified portfolio of 18 properties in Singapore in the high-tech industrial, warehouse and logistics, chemical warehouse and logistics, and general industrial sectors. Its total assets amount to around $966 million as of June 30.

The REIT has consistently outperformed the industrial REITs, as evidenced by The Edge Singapore’s data-driven Billion Dollar Club (BDC) algorithms. Sabana Industrial REIT outperformed the REITs with a market capitalisation of under $1 billion in total unitholder returns to investors for the three years from March 31, 2019 to March 31, 2022, based on BDC metrics. Donald Han, CEO of Sabana Industrial REIT’s manager, took over the running of the REIT in January 2018.

Based on performance so far up to Oct 20, Sabana Industrial REIT is one of the top five performers within the entire S-REITs sector. What is its secret? Han says: “My focus is on doing well. Being the smallest industrial REIT means we have a smaller margin for error, and to have done well means our Refreshed Strategy is working.”

Han’s “Refreshed Strategy”, introduced after he was appointed CEO of the manager in January 2018, focused on leasing, occupancy, tenants, and capital management. In addition, Sabana Industrial REIT has a natural advantage for investors. Singapore-focused REITs have been the most resilient. “If you want income stability, invest in SGD (Singapore dollar) assets as they provide protection and shelter from the foreign currency exchange risks.”

A ‘Refreshed Strategy’

The “Refreshed Strategy”, introduced in early 2018, comprised three parts. The first phase focused on increasing occupancy, retaining key tenants, and driving revenue. Another critical component of this phase was the selective divestments of underperforming and matured assets. The second phase was on asset enhancement initiatives (AEIs) and the rejuvenation of selected assets.

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The REIT’s flagship property, New Tech Park (NTP) at Lorong Chuan, had an unutilised gross floor area (GFA). Since then, a commercial component has been added to NTP, turning it into an attractive business hub integrated with numerous retail and lifestyle options.

The third phase sets the stage for potential yield accretive acquisitions in Singapore and overseas. Underpinning the Refreshed Strategy throughout these three phases is prudent capital, risk management and cost rationalisation, where the manager would identify additional operational efficiencies.

After four years of stabilising the REIT, Han shared that as the REIT enters the Grow Value phase, this means further intensifying the REIT’s work progress under phase two and moving into phase three to grow value for unitholders. He announced five new strategic priorities: A new target to upsize portfolio valuation to more than $1 billion in three to five years; plans for a significant AEI for 1 Tuas Avenue 4; accretive acquisitions; continuing to watch leverage and advancing the REIT’s ESG goals.

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Says Han: “When I came on board, we decided to focus on two criteria, which were to ensure we ramp up occupancy and stabilise the REIT because many master leases were due for expiry. Between 2019 and 2020, we had multiple master leases to be converted to multi-tenanted properties.”

Multi-tenanted properties require more significant effort to lease out as more time is needed for occupancy to stabilise and subdivision costs are incurred. In addition, in converting master leased properties to multi-tenanted, some reduction in the net lettable area may occur due to the creation of common corridors.

In its latest 3Q2022 business update, Sabana Industrial REIT reported strong and resilient performance. “We signed 83,588 sq ft of new leases with tenants primarily from the logistics and supply chain and media and publishing trade sectors and renewed 71,266 sq ft of leases with a positive 10.2% rental reversion, which is our 10th positive quarterly reversion in the past 11 quarters,” says Han. He adds that the REIT achieved a portfolio occupancy of 89.1%, a new high since 3Q2017. Excluding 1 Tuas Avenue 4, which is undergoing AEI, occupancy would have been 92.2%.

‘High single digits’

The AEI of NTP+ mall, which comprises approximately 43,000 sq ft of commercial GFA, was completed in 2021 but had challenges. The construction period was done mainly through the first year of Covid-19. “When you build something in a “live” environment, it’s harder. You need to ensure minimal disruption to the operating environment,” Han says. For instance, no piling work was allowed during office hours. At any point, noise reverberation and vibration were frowned upon mainly because NTP+ is built above the Lorong Chuan MRT lines and nestled within a sizeable residential enclave.

How is NTP+performing? “Returns are in the high single digits. During our construction, we kept costs contained despite Covid-19. We announced that the total project cost was about $20 million, which includes the differential premium,” Han says. “If you consider NTP+ as a standalone, it ranks among the top 10 properties in terms of its contribution to our portfolio rental income. It’s like buying another property, except it’s a newbuild connected to NTP.”

“NTP+ is 100% full with average lease of three years. General market rental indicators have firmed with the economic re-opening, and we are confident of holding rentals or seeing a small uptick. I insist all my staff have their meals at the mall, and salaries may be paid in NTP+ vouchers!” Han jokes.

The F&B outlets have no shortage of customers. Students from nearby schools and junior colleges frequent NTP+ afternoons, with the office crowd in the evenings. “I’ve got a different crowd. Most malls’ lull time is 2pm to 5 pm during weekdays. However, I have school students patronising our mall during this period which sees our tenants like Wine Connection and COLLIN’S® dishing out affordable tea time promotions,” Han says.

In October 2021, Sabana Industrial REIT’s business requirements to comply with Shariah principles were removed. This further enhanced Han and his team’s flexibility in leasing out NTP+. The mall has mini-anchors like Anytime Fitness and Ace Signature supermarket, as well as speciality café like Dutch Colony. Interestingly, tenants like Kopi Clan, Foodies’ Clan and Ace Signature have also used NTP+ as a springboard to expand to other locations.

“It is not common for an industrial property to get a change of use, for which we fought hard. We are creating a retail and F&B component that benefits our office tenants and the neighbouring community at large, thus contributing the ‘S’ in ‘ESG’” says Han.

As he tells it, when he first became CEO of the manager, Han went to meet all his major tenants especially those at NTP. A few major tenants told him they planned on leaving NTP because they wanted to be in newer buildings with amenities. “Then, the only amenities we had were a café and a miserable canteen,” Han recalls.

“We didn’t have enough amenities while many newer places offer integrated facilities. I took the feedback constructively and acted on it,” Han adds. However, Covid-19 hit, and construction was delayed for 10 months. NTP+ was scheduled for completion in April 2020 but was completed in March 2021 instead.

“The desire to create this was also about engaging and convincing the authorities because it benefits the residential enclave, which is why we onboarded a supermarket,” Han continues. He paid tribute to the authorities, especially URA and LTA, for their shared foresight and support for this AEI project.

Not only has NTP+ added to Sabana Industrial REIT’s DPU — from 2.92 cents in 2019, DPU dropped to 2.76 cents in 2020 (year one of the pandemic) but has rebounded to 3.05 cents in 2021. In 1H2022 (for the six months to June 30), Sabana Industrial REIT reported a DPU of 1.59 cents, which annualises to 3.18 cents.

With its successful transformation on the back of the NTP+ mall completion, NTP was shortlisted for architectural awards honouring the best projects in architectural design in Singapore when it was nominated for the Singapore Institute of Architects (SIA) Architectural Design Awards 2022 (Special Categories). NTP was also shortlisted for the World Architecture Festival (WAF) 2022 Awards under the “New & Old” completed buildings category. This is the largest global architecture event for which past winners include the Helix Bridge, Kampung Admiralty and the cooled conservatories at Gardens by the Bay. The event will be held from Nov 30 to Dec 2.

More AEIs

The success of NTP+ provides a platform for Sabana Industrial REIT to embark on a second major AEI at 1 Tuas Avenue 4. The property is being rejuvenated to accommodate either a logistics tenant and/or other users. The property will incorporate green and intelligent features.

“We want to keep an eye on decarbonisation and ensure that when we do our projects, we want them to be sustainable and where returns commensurate with our goals and objectives,” Han says. For instance, the asset rejuvenation plans at 508 Chai Chee Lane and NTP include energy consumption conservation, changing lighting to LED, and EV charging stations in the car park.

Han’s next goal is to expand the portfolio. Ideally, he would like to acquire a freehold or a long land lease. Still, these are hard to come by in the industrial sector in Singapore that would make sense for Sabana Industrial REIT’s unitholders. Freehold industrial assets tend to trade at very tight yields.

Sabana Industrial REIT’s size and Singapore portfolio result in its resilience. Because of its relatively smaller size, it has not attempted to acquire assets overseas yet, preferring to wait for the macroeconomic uncertainties and geopolitical dust to settle. Eventually, Han is looking to grow the portfolio via acquisitions, and a developed overseas market would be a consideration. “Some of the best opportunities present themselves when the chips are down. If we acquire it, it will be bite-sized,” he adds.

The Singapore economy appears to be on a surer footing. The Republic’s 3Q2022 GDP grew by 4.4% y-o-y. According to Cushman & Wakefield’s July 2022 report, demand for prime logistics and warehouse space is underpinned by stockpiling demand for goods and food in the near to medium term. Over the longer term, demand from high-value manufacturing and e-commerce.

With a positive outlook for Singapore industrial properties, coupled with the city-state’s haven status, it is perhaps no surprise that Sabana Industrial REIT has attracted a new major unitholder in the form of Swiss company Volare Group AG. Volare has accumulated a 5% stake in Sabana Industrial REIT, announced in August in Singapore Exchange filings. The REIT’s largest unitholder is ESR Cayman Limited, with more than 20%, followed by Quarz Capital Asia (Singapore), with 13%.

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