Industrial Reits set to continue bullish run in 2021: analysts

Singapore

DESPITE having outperformed their Singapore real estate investment trust (Reit) counterparts last year, analysts are optimistic that industrial S-Reits will continue their bullish run in 2021.

At a virtual media briefing on Asian property sector in 2021 on Monday, Lee Wee Liat, managing director of corporate broking and sales Asia-Pacific at BNP Paribas, said with reference to the zero interest rate environment back in 2010 to 2015, "it's pretty unanimous" that Reits in places such as Singapore, Hong Kong, Australia and Japan "always outperformed the overall general stock market index".

Given the likelihood of the Federal Reserve holding interest rates at zero till 2023, Mr Lee said he expects a similar situation to play out this year, as the liquidity condition and interest rates in Asian markets "highly correlate with the Fed's interest rate policy".

"In the Singapore Reits market... the one that you want to pick is actually the industrial Reits - this one consistently outperforms. Industrial means you're talking about the logistics Reits and data centre Reits," he added.

In response to queries from The Business Times after the briefing, Mr Lee said "we should at least expect this to be another three to five years of outperformance".

He said: "Earnings of these logistics companies are also significantly better than other Reits sectors... and the growth in e-commerce demand is significantly higher than the ability of logistics developers to roll out new supply of good quality logistics warehouses.

"On data centres, this demand-and-supply dynamics is even more skewed, with demand significantly higher than supply."

Jefferies equity analyst Krishna Guha agreed, saying S-Reits in general, particularly industrial Reits, are good portfolio hedges for 2021.

"Sporadic outperformance can result from resurgence of virus and its variants, news flow related to complications from vaccines and any reversal of reflation trade," he added.

However, Mr Guha noted that against the backdrop of their outperformance in 2020, rising 10-year yield and expected tapering of pandemic-related relief measures, industrial Reits may face challenges relating to comparables, distribution per unit (DPU) growth and asset revaluation.

When it comes to picking winners, Maybank Kim Eng analyst Chua Su Tye said in a report published on Jan 4 that Ascendas Reit remains the brokerage's top pick, "as strong execution on (asset enhancement initiatives), redevelopments and acquisitions has increased the concentration of 'new economy' type assets, while its sound balance sheet should support further scaling up of portfolio in its core markets".

Other picks from the brokerage include Mapletree Industrial Trust and Mapletree Logistics Trust.

DBS analysts Dale Lai and Derek Tan said in a report last December that they expect acquisition activities for industrial Reits to continue in 2021, given how they "also have the largest acquisition pipeline from their respective sponsors".

"As industrial properties have remained relatively resilient throughout the pandemic, investment interest has been healthy. Moreover, interest rates are expected to remain low in the foreseeable future, which has driven industrial property yields down."

Based on CBRE's September 2020 cap rate survey, institutional grade logistics assets in Singapore are at cap rates of 5.5-6.25 per cent as at last September.

The DBS analysts added: "Industrial S-Reits are projected to deliver a five per cent growth in DPUs in 2021, aided by acquisitions while organic growth is expected to remain stable. Given the availability of pipelines coupled with attractive cost of capital, we anticipate more to tap the market in the future."