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Phillips: 2 Industrial REITs With 15% Return Potential
Aspire, Hot Picks | 17 November 2015
By: Lim Si Jie
Articles (169) Profile

Based on advanced GDP estimates released in Q3, Singapore managed to avert slipping into a technical recession. The economy grew 1.4 percent in the three months to September over the same period a year ago, the slowest pace in three years. Despite slowdown in the economy, Phillip believes that two particular REITs (Cache Logistics Trust and Soilbuild Business Space REIT) are worthwhile additions into the investment portfolio.

Slowing Manufacturing Activities

Key manufacturing indicators for 3Q 2015 continues to show weakening industrial activity. Concerns over anaemic growth continue to linger, as Singapore’s central bank moved to slow the appreciation of the Singapore dollar for the second time in 2015.

Economic Outlook Spoils Expansion Plans

With the weaker manufacturing activity in the past three quarters this year, and the uncertainty in the global macro economy, businesses are looking to cut back on expansion plans. Tenants with lease expiries during the quarter may opt for smaller spaces or even decide not to renew. Moving forward, rental in the REIT sector is expected to continue easing.

Ability to Maintain Rent Is Key

While the continued fall in rental rate is nothing new, the avoidance of a technical recession remains a silver lining for industrial REITs. According to Phillips, a key factor to look out for in REITs will be the holding power of landlords and their ability to maintain rent levels.

In particular, Phillip believes that rents for new assets as well as Business Parks & High-specs buildings will hold up better compared to the rest of the S-REIT sector.

Investors Takeaway: Industrials REITs

1.       Soilbuild Business REIT

Overall, Phillip believes that Business Park spaces will be in short supply as there are no new spaces coming on stream after 2016, resulting in higher rent.

Occupancy Remains High With New NLA Leased

Portfolio occupancy was 99.8 percent as at end June 2015. Portfolio occupancy remains high at 98.7 percent in Q3 2015. Multi-tenanted buildings (Eightrium & Tuas Connection) were fully occupied, except for West Park BizCentral at 95.1 percent.

SBREIT has 11.8 percent outstanding lease by Net Leasable Area (NLA) expiring in 2015, out of which 7.3 percent of portfolio NLA were renewed by renewals and new leases signed in 3Q FY15.

Expect New Acquisition

Soilbuild Business REIT’s track-record of DPU growth has been mainly through acquisitions. There has been steady DPU growth since the maiden acquisition (Tellus Marine) in 1Q FY14 till the most recent acquisition in 2Q FY15 (Technics Offshore). An acquisition within the next two quarters will be required in order to maintain the momentum in DPU growth.

Relative Valuation

Comparing Soilbuild Business REIT against peers with exposure to Business Park space in their respective portfolios, Soilbuild Business REIT is relatively under-valued and has a higher historical yield compared to the larger market capitalised Industrial S-REITs. These two factors suggest there is still room for yield compression for SBREIT.

Soilbuild Business Space REIT: Accumulate, TP $0.91

2.       Cache Logistics Trust

Phillip believes that Cache Logistics Trust remains as the best proxy to Singapore’s Logistics Hub status. The weak industrial activity during 3Q FY15 will have minimal impact on Cache as only two percent of its portfolio NLA is up for renewal in the remainder of 2015.

Support to DPU

Cache recently announced the acquisition of its fourth warehouse in Wacol, Queensland, Australia. The fourth Australian warehouse (Wacol) will begin contributing in November 2015.  In addition, the Build-to-suit DHL Supply Chain Advanced Regional Centre (DSC ARC), which is a joint investment between Cache and DHL, will start contributing in January 2016. These additional properties should boost the portfolio income and add to Cache’s Distribution per Unit (DPU) from Q1 FY16 onwards.

Historical Low Valuation

Cache’s current valuation is close to historical lows. P/NAV is currently at about -1 historical standard deviation of 1.06x. The current yield is in excess of eight percent and offers some cushion to any near term downside.

Cache Logistics Trust: Accumulate, TP $1.11

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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