SINGAPORE (Feb 12): Phillip Capital is maintaining its "equal weight" recommendation on the Singapore industrial REIT sub-sector given the rental market is expected to remain soft and renewal rates stay negative even with the tapering of new supply this year.
Industrial REIT managers have expressed varying degrees of optimism with some believing rents to bottom in 1H18, while others believe it to bottom in 2H18, says the research house.
In a Monday report, analyst Richard Leow says the uncertainty lies in the exact bottom for rents, but believes it should take place by end-2018.
Although 4Q17 Rental Index was higher q-o-q, driven mainly by the warehouse segment, negative reversions are expected to persist in 2018, compared to the higher Rental Index from three years ago.
"We would like to see a broad based improvement in occupancy, in order to upgrade our sector view for Industrial REITs," says Leow.
Leow says industrial REIT managers are seeing more enquiries compared to a year ago. Demand is coming from trade sectors such as transport and storage, IT, precision engineering and food and beverages. However, it is still taking time for enquiries to convert into actual transactions.
"Managers are still actively engaging tenants to maintain occupancy, as it is a tenant's market," says Leow, "We also hear managers emphasising on tenant credit quality."
Among key takeaways from the fourth quarter, Mapletree Industrial Trust (MINT) expanded its investment mandate to include data centres outside of Singapore, capped at 20% of aggregate portfolio value. And Soilbuild Business Space REIT (SBREIT) expanded its mandate to include Australia.
Meanwhile, ESR-REIT is acquiring all the stapled securities of Viva Industrial Trust (VIT) by issuing new ESR-REIT units. This could encourage consolidation among smaller REITs to improve scale and bring about better operating efficiencies.
In addition, industrial S-REITs generally reported negative renewal rates, with the exception of Ascendas REIT and Mapletree Logistics Trust.
The soft rental market resulted in investment property revaluation losses for the six REITs -- Cache Logistics Trust, ESR-REIT, Keppel DC REIT, Sabana REIT, SBREIT and VIT -- that reported their full-year results.
"Our view remains unchanged for negative reversions to persist in 2018, and we believe rents to bottom only by the end of 2018," says Leow.
Phillip has "buys" on Ascendas REIT and Cache Logistics Trust with target prices of $2.89 and 93 cents respectively.
"Singapore is evolving towards higher value-added manufacturing and there is a push with the Smart Nation initiative. We like REITs that can capture this opportunity with Business & Science Park properties and Hi-Tech/Hi-Specification buildings," says Leow about Ascendas REIT.
"We upgraded Cache Logistics Trust to Accumulate during this results cycle, on the basis of its strengthened balance sheet and ability to execute its rebalancing strategy," adds the analyst.
As at 12.08pm, units in Ascendas REIT and Cache Logistics Trust are trading higher at $2.60 and $0.84 with trailing P/NAV of 1.24x and 1.17x respectively.