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Acquisition growth to continue for industrial S-Reits in 2021

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Stoppage in construction works due to the pandemic is expected to delay the completion of about 700,000 sq m of new industrial supply in 2020, which will be rolled over to 2021, says DBS.

Singapore

DBS Group Research expects Singapore industrial real estate investment trusts (Reits) to deliver 5 per cent growth distributions per unit in fiscal 2021, aided by acquisitions with potential for more, it said in a sector note on Friday.

The research team's top picks are Mapletree Logistics Trust (MLT), Frasers Logistics & Commercial Trust (FLCT) and Ascendas Real Estate Investment Trust (Ascendas Reit) for their "superior growth profile".

DBS analysts Dale Lai and Derek Tan expect industrial S-Reits to be the most active segment moving into fiscal 2021. To-date, industrial S-Reits have completed and announced more than S$5 billion worth of acquisitions.

Despite the expected rise in activity, Mr Lai and Mr Tan noted that the excess supply of industrial space in Singapore in 2021 may lead to organic rental growth potential in the sector becoming more tempered.

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Extended stoppage in construction works due to the Covid-19 pandemic is expected to delay the completion of about 700,000 square metres (sq m) of new industrial supply in 2020. This new supply will be rolled over to 2021, bringing the amount completed in the year to 2.2 million sq m, DBS said.

"With time needed to absorb the new incoming supply, we believe that most landlords will likely remain accommodative and focus on tenant retention in the near term, implying that organic rental growth potential will likely be more tempered," they said.

The analysts added that most of the excess supply will be in the multi-user and single-user factories, while the supply of warehouse and business parks will remain constrained.

Among the various industrial asset classes, the research team prefers exposure within the business parks/high-specifications and logistics, as they will likely see demand, on the back of Singapore's modern information technology infrastructure and conducive business landscape.

The inflow of startups in the deep-tech space and continued expansionary demand from high-value manufacturing, such as precision engineering, biomedical, medical technology and telecommunications, will continue to drive demand for these real estate sectors, showed the research note.

In these sectors, the limited quality stock will mean rental growth and take-ups are likely to be more robust in the medium term, the analysts said.

Moreover, Singapore's strategic positioning in the Asean region and strong network links imply that the country could be a choice location for vaccine distribution from 2021.

"We believe that upside in demand in the logistics space in support of the vaccine distribution in Asean is not priced into share prices as yet," the analysts said.

If this happens, DBS believes logistics-focused players like MLT and ARA Logos Logistics Trust will be the most leveraged.

On Friday, MLT units closed 1.6 per cent or S$0.03 higher at S$1.94; ARA Logos Logistics Trust closed flat at S$0.60; Ascendas Reit rose 0.7 per cent or S$0.02 to S$2.97; while FLCT closed at S$1.37, up 3 per cent or S$0.04.

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