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Broker's take: Excess industrial supply in 2021 may temper rental growth, says DBS

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Mapletree Logistics Trust's (MLT) Mapletree Logistics Hub in Toh Guan. DBS's top picks are MLT, Frasers Logistics & Commercial Trust and Ascendas Reit for their "superior growth profile".

DBS Group Research on Friday said excess supply of industrial space in Singapore in 2021 may lead to organic rental growth potential in the sector becoming more tempered.

This comes amid expectations that the extended stoppage in construction works due to the Covid-19 pandemic will 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 in a research note on Friday.

DBS analysts Dale Lai and Derek Tan said the excess supply is "significant" and will likely pose a near-term hurdle for the industrial sector.

"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.

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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, according to 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.

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

Industrial real estate investment trusts in Singapore are projected to deliver 5 per cent growth in distributions per unit in fiscal 2021, aided by acquisitions, with potential for more in 2021, DBS said.

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".

As at 12.34pm on Friday, MLT units were trading 0.5 per cent or S$0.01 higher at S$1.92, FLCT units were up 2.3 per cent or S$0.03 at S$1.36, Ascendas Reit units rose 0.3 per cent or S$0.01 to S$2.96, while units of ARA Logos Logistics Trust were down 0.8 per cent or 0.5 Singapore cent at 59.5 cents.

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