Industrial Reits - OCBC

Common themes of 3QCY10 results; OVERWEIGHT

Positive Outlook. At 3QCY10 results, we found a few common themes in the guidance given by the industrial REIT managers: positive outlook, strengthening rents, acquisitions and equity fund raising (EFR). The unifying motivation is to capitalise on the recovery cycle that will both strengthen the REITs and also grow distributable income.

Economic conditions remain favourable. Non-oil domestic exports (NODX) grew 23% YoY in Sep 10. Manufacturing output also increased 26.2% YoY. Going forward, the government remains committed to keep manufacturing as a key economic-driver in Singapore with new stimuli to raise the productivity and image of the different industries. These include a new branding campaign called the “We Can Movement” to attract talent to the logistics/SCM industry and the commitment to inject $16.1b over the next five years to support research, innovation and enterprise in the biomedicalsciences, electronics, info-communications, as well as other “white spaces”.

Industrial rents strengthening. The 3Q10 price and rental indices of industrial space continue to improve by 8.3% and 4.8% QoQ, respectively. Rental rates for business parks moderated slightly to S$3.65 psf pm while both light industrial and warehouse rental rates improved by 6.5% and 3.3% to S$1.65 psf pm and S$1.55 psf pm, respectively. With improved rail connectivity to the suburban regions, we also expect further upside to the industrial buildings situated near the upcoming MRT lines (Downtown, Thomson, Eastern Region).

Acquisitions are back on the table. Mapletree Logistics Trust (MLT) has acquired some 11 properties in Asia YTD on the back of a S$305m EFR launched in Sep 10. A-REIT has also completed the acquisition of 31 Joo Koon Circle and DBS Asia Hub for S$131m in Apr 10. Cambridge Industrial Trust is undergoing a S$50.4m EFR presently to fund the acquisition of 25 Tai-Seng Avenue, 511/513 Yishun Industrial Park A and two other potential sites for S$73.2m. In addition, the two newly-listed REITs this year, Cache Logistics Trust and Mapletree Industrial Trust may be silent for now, but we look forward to them contributing actively to the acquisition pot progressively.

Valuations. The industrial sector typically lags the office sector by a few quarters. With the upbeat momentum in the office space, Industrial REITs stand to capitalise on the spillovers to business parks, high-tech and light industrial buildings. In terms of forward yields, Industrial REITs also trade at a premium of 70 basis points to the broader sector. We are bullish on the industrial sector recovery and now have an OVERWEIGHT rating for the Industrial REITs subsector. Top of our pick is Mapletree Logistics Trust (MLT) with a fair value estimate of S$0.97.