SINGAPORE (June 18): The internet and e-commerce are disrupting the role of shopping malls but spurring demand for certain kinds of industrial properties.
“We see strong growth for data centres and logistics assets in the region, with demand drivers being an increased need for data usage and storage, domestic consumption, and e-commerce penetration,” says Chua Su Tye, investment analyst at Maybank Kim Eng. But real estate investment trusts that specialise in “industrial” properties are actually quite a mixed bag. The assets they own encompass everything from business parks serving a wide range of tenants to a warehouse operated by a single tenant. There is also a wide range of sponsors operating in the field, from heavyweight institutions such as Mapletree Investments and Ascendas-Singbridge at the top end, to all manner of entrepreneurs and industrial companies at the other.
Many of the major industrial property REITs do not have an especially high exposure to these fast-growing, technology-enabled sectors linked to the e-commerce boom. For instance, Ascendas REIT, the largest of the locally listed industrial REITs, has only 22% of its total portfolio value in logistics assets. Warburg Pincus-backed ESR-REIT has 20% of its portfolio value in logistics facilities; and 33% of Frasers Logistics and Industrial Trust’s gross rental income comes from the logistics sector. Not all of the logistics properties owned by these REITs serve the e-commerce sector. “It is clear that e-commerce is a key driver of demand for logistics space, although the figure is hard to quantify, given that the tenants of these assets are categorised by trade sectors and so their e-commerce contribution is not so transparent,” Chua says.
Playing the e-commerce boom through the locally listed REITs is further complicated by the varied investor following each of them has managed to garner. Notably, the largecap REITs with heavyweight sponsors trade at price-to-book valuations of more than 1.1 times, while mid-cap ones are around 0.7 times, according to OCBC.
In fact, some smaller REITs, even when they have a good slate of modern logistics facilities, have not been able to entice investors. “Names like Cache Logistics Trust have some modern logistics in Singapore, but they are much smaller by market capitalisation and tend not to be on the radar of a lot of institutional investors,” says Toshio Tangiku, Asia-Pacific real estate equities analyst at Aberdeen Standard Investments. “The large, liquid REITs, like A-REIT, Mapletree Industrial Trust and Mapletree Logistics Trust, trade at premiums but also own assets that are not considered modern logistics.”
In any case, most of the smaller industrial REITs do not have especially interesting portfolios that would distinguish them from the larger and more liquid REITs. “The scale of value creation and distribution per unit growth is not material enough to compel investors to own the stocks despite the lack of liquidity and scale: The smaller REITs tend to be smaller but similar versions of their larger counterparts,” Tangiku says.
In fact, it is the larger industrial REITs that tend to have sponsors with a ready pipeline of assets, which they can acquire to grow their portfolios. This is another reason that the larger industrial REITs trade at relatively high valuations. “If the sponsor has an existing pipeline of assets, then the markets might be willing to pay higher share prices for the REIT as they attempt to price in some of the expected growth from acquisitions. Then, you have a positive cycle, where the REIT trades at a premium valuation and is able to call on the markets for equity financing when it wants to make large-scale acquisitions,” says Tangiku. The challenge for EC World REIT now is to convince the market that its sponsor Forchn Holdings as well as Forchn’s new partner YCH, from which it is acquiring $400 million worth of assets, will be able to provide it with a steady stream of assets to acquire and grow. If that helps lift the market valuation of its units to the level of its larger peers, it could make it all the easier of the REIT to acquire from Forchn and YCH.
