Stock Name: AscendasreitCompany Name: ASCENDAS REAL ESTATE INV TRUST| Research House: DBS Vickers | Price Call: HOLD | Target Price: 2.24 |
Stock Name: MapletreeIndCompany Name: MAPLETREE INDUSTRIAL TRUST| Research House: DBS Vickers | Price Call: HOLD | Target Price: 1.43 |
Stock Name: CACHECompany Name: CACHE LOGISTICS TRUST| Research House: DBS Vickers | Price Call: HOLD | Target Price: 1.26 |
THE THREAT OF oversupply is looming over the industrial property sector. Come 2013, a gush of new industrial space is expected to flood the market and investors need to keep a closer eye on this asset class. From now till 2015, spot rental rate might drop between 7 and 10% while vacancy rates increase by between 4 and 5% across the sector, cautions DBS Vickers in a report on the industrial REIT sector.
Despite the tepid economic growth, industrial properties have done well this year. Firstly, there has been a lack of “meaningful” supply over the past two years. Total industrial space at 7.5 million sqft is not only at a 10-year low but also 20% lower than the 9.1 million sqft annual average over the past decade. This has caused industrial space vacancy levels to hit a record low of 6%, thus driving up average rental for both factory and warehouse space by a third although the pace of increase has moderated recently. Capital values, meanwhile, rose between 6 and 26% since the start of 2012.
To be sure, the residential property asset bubble has been stoked by strong liquidity and historically low interest rates. But the numerous rounds of cooling measures introduced by the government diverted investor attention towards the industrial sector. In particular, the smaller-sized strata-titled units drew a lot of buying interest from non-traditional sources.
However, challenges loom. “Looking ahead, we see market dynamics turning given that close to 49.7 million sqft of industrial space currently under construction will be completed over 2013-2015. This, on an annualised basis, represents more than twice the annual supply over the past decade,” write DBS Vickers’ analysts Derek Tan and Lock Mun Yee the Dec 6 report.
The new supply is not going to be soaked up by new demand all too readily as the heavily exposed Singapore economy shares the pain of its major trading partners. According to the Economic Development Board’s 4Q2012 business expectations survey, 11% of manufacturers expect further worsening in business conditions over the next half year.
“Sentiment is noted to have been markedly different from brighter expectations in the prior two quarters and reflects the dip in business confidence among manufacturers going forward,” states DBS Vickers. “We believe that manufacturers are likely to continue to adopt a ‘wait and see’ attitude towards future plant expansion plans and potentially, even in some cases, cease to continue operating in Singapore. The leasing environment could turn quiet as take-ups for factory space could weaken.”
As a whole, Singapore’s small and medium enterprises (SMEs) can be considered a major tenant but they are increasingly vulnerable to business stresses as the government maintains a strong grip on foreign labour which many SMEs have grown over-reliant on. As a result, there is a risk some of these SMEs relocating or shutting down altogether if they can no longer cope here. “While we do not anticipate a mass relocation or closure of SMEs and other industrial players in the immediate term, we believe that affected companies will likely consolidate their space requirements as they rationalise their future needs as production levels fall below optimal capacity,” writes DBS Vickers.
Furthermore, there is a chance that the government will impose more measures to coold the industrial sector before it gets too hot. For one, there are restrictions on how small the strata units can be and reduction in certain land tenure from 60 years to 30 years. The government, according to DBS Vickers, is likely to keep a “watchful eye” on balancing genuine demand from industrialists while smoking out speculative activities.
Nevertheless, for now, DBS Vickers expect “minimal” impact on earnings at this point and is keeping the vacancy assumptions, as the landlords are likely to be proactive in getting tenants to renew their leases. “However, we remain mindful of the potential of downside risks to our forecasts if operating environment continues to weaken.”
Tan and Lock’s model shows that for every 1 percentage point drop in occupancy rate, there will be a 0.8% to 1.2% hit on distribution per unit for REITs, which, is seen as still “marginal and manageable”.
Of the five industrial REITs under DBS Vickers’ coverage, there are two “buy” calls: Mapletree Logistics Trust and Cambridge Industrial REIT, with target prices of $1.22 and $0.72 respectively. The remaining three are “holds”: Ascendas REIT, Mapleetree Industrial Trust and Cache Logistics Trust with target prices of $2.24, $1.43 and $1.26 respectively.
