Brokers' take: DBS says redevelopment opportunities to drive future growth for industrial Reits

INDUSTRIAL real estate investment trusts (Reits) should look into redevelopment projects or asset enhancement opportunities as their "next leg of growth", DBS Group Research said.

In a report on Wednesday (Dec 1), the research team said industrial Reits should shift their focus to assets which are undervalued or with lower in-place occupancy rates and room for asset enhancements, to create value through higher rental rates in the future.

Although industrial Reits have benefited from investing in new-economy assets such as logistics, data centres and business parks, DBS noted that the Reits are increasingly being "crowded out" by investors willing to accept lower yields on their real estate investments amid a low interest rate environment.

A possible oversupply of industrial space in FY2022 - due to construction delays amid the pandemic - could also weigh on rental growth prospects.

Hence, DBS said it prefers large market capitalisation industrial Singapore Reits as they are better positioned for redevelopment and asset enhancement initiatives, with access to acquisition pipelines from sponsors.

The research team named Frasers Logistics and Commercial Trust (FLCT), Keppel DC Reit and Mapletree Industrial Trust (MIT) as its picks for the sector.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

FLCT BUOU : BUOU 0%, after its annual portfolio revaluation exercise, has a sizeable debt headroom to fund future acquisitions, and it can also tap its sponsor's portfolio of new-economy assets as it shifts to more development projects.

The research team also likes FLCT for its exposure to logistics facilities and business parks in the developed markets of Australia and Europe.

Units of FLCT were trading at S$1.46 as at the midday break on Dec 1, down S$0.01 or 0.7 per cent.

For Keppel DC Reit AJBU : AJBU 0%, DBS forecasts a more than 8.5 per cent rise in its FY2022 distribution per unit (DPU), driven by acquisitions and asset enhancement initiatives completed this year, implying an attractive 4.6 per cent yield.

Keppel DC Reit units were trading at S$2.37, up S$0.02 or 0.9 per cent.

As for MIT ME8U : ME8U 0%, the research team is estimating a "very attractive" DPU compound annual growth rate of more than 6.8 per cent between FY2020 and FY2022, with redevelopment projects underway, on top of a possible increase in MIT's concentration in data centres to 58 per cent, from the current 53 per cent.

Units of MIT were trading flat at S$2.64.

DBS expects earnings growth of industrial Reits will normalise ahead, due to the lack of reversals of retained earnings, lower acquisition yields leading to more marginal DPU accretion, and gradual earnings from development projects embarked on in FY2021.

But the growth is still "too attractive to ignore", with an overall DPU growth of 3.1 per cent compared with the average annual DPU growth of 2.1 per cent in the past decade.

Through a gradual overseas diversification and a pivot towards new-economy assets, industrial Reits have also transformed into stable income-generating vehicles with significant earnings growth potential and room to unlock value within their portfolio, DBS said.

READ MORE

• Acquisitions to take centre stage as industrial S-Reits seek further growth
• Overseas offices, industrial properties dominate S-Reits' acquisitions