SINGAPORE (July 26): DBS is keeping a positive outlook on Singapore Industrial REITs.

The Singapore manufacturing sector is currently showing signs of a rebound in activity and this is giving the Industrial REITs sector a boost.

In a Wednesday report, analyst Mervin Song believes that the manufacturing sector will start to moderate in 2H17. This slowing growth momentum could mean that manufacturers might turn to picking up the slack in current production capacities before having plans to expand.

“That said, with the industrial sector seeing a supply drop off to mean that operating environment should improve year-on-year but a more sustained recovery will only come from 2H18 onwards,” says Song.

DBS’ top “buy” picks include Ascendas REIT (A-REIT), Mapletree Logistics Trust (MLT) and Frasers Logistics and Industrial Trust (FLT) with target prices of $2.78, $1.28 and $1.15 respectively.

The analyst likes these REITs as they have the availability and propensity to acquire inorganically and still deliver upside earnings.

Meanwhile, investors are currently having a positive outlook on industrial REITs following higher rentals in 2018, but Song warns that the recovery is likely to be gradual and uneven.

“While we forecast a c.3-5% growth in market rents in 2018, we believe rental reversions are however, expected to remain negative at least till 2019 where we see a closing of the spread between market and expiring levels,” says Song.

The business park sector is projected to probably be the only subsector to see positive rental reversions in 2018F, but upside potential is capped by the high market vacancy rate of 17% in 1Q17.

Therefore, before a more meaningful rent increase is seen, more slack has to be absorbed first.

“Given this trend, we believe that industrial REITs are expected to continue to see at best a flattish DPU growth trend in FY18F (ranging -3.0% to 3.0%) and turning upwards only from FY19F,” says Song.

The analyst predicts that with a low gearing of about 34%, the industry will have debt headroom to acquire to boost DPUs, but given the strong liquidity environment, competition remains to be intense for industrial assets.

Units in A-REIT, MLT and FLT are trading at $2.72, $1.24 and $1.09 respectively.

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