Amid excitement over tourism rebound, don’t overlook industrial S-Reit resilience

PLENTY of ink has been spilled about the hospitality sector rebound following China’s relaxation of border restrictions to restrict the spread of Covid-19.

To a lesser – though still significant – extent, the retail sector has also been touted as one of the key beneficiaries of an impending influx of Chinese tourists.

But investors should not overlook the resilience and potential upside of Singapore-listed real estate investment trusts (S-Reits) in the industrial space.

In a recent conversation with a Reit manager, I was reminded about how challenging it is for S-Reits in the industrial sector to make the news – unless for the wrong reasons.

For one, most industrial properties are tucked in the lesser-visited parts of Singapore: Tuas, for instance, or Changi. For retail investors, out of sight often means out of mind.

Besides, the acquisition of a ramp-up logistics property – no matter how state-of-the-art it is purported to be – would struggle to capture the imagination compared with a more familiar hotel or shopping mall.

Consider, for instance, the recent sale of a portfolio of heartland mall properties by NTUC unit Mercatus.

The Singapore market was abuzz as Hong Kong-listed Link Reit snapped up Mercatus’ Jurong Point and Swing By @ Thomson Plaza retail assets, while Frasers Centrepoint Trust (FCT) and sponsor Frasers Property (FPL) teamed up to buy a 50 per cent stake in Nex.

It was probably less exciting to hear that Mapletree Logistics Trust (MLT) was selling two warehouses in Malaysia and a property at Changi South Lane.

Yet, some industrial S-Reits prove their resilience last year. And it would be foolish to overlook their place in a well-balanced portfolio.

Credit Suisse noted in a research report that prices and rentals of industrial properties in Singapore rose for the ninth consecutive quarter in the fourth quarter of 2022 ended December, gaining 2.1 per cent quarter on quarter or 6.9 per cent year on year.

While rental reversion is forecast to moderate in 2023 due to softer economic and manufacturing growth momentum, large-cap industrial S-Reits with well-diversified portfolios and prudent balance sheets could continue to be favoured for their defensiveness.

This year, the expectation of a slower pace of interest rate increases has been a key catalyst for the S-Reit market.

The iEdge S-Reit Index posted total returns of 7.1 per cent in January – double that of the benchmark Straits Times Index (STI), which generated total returns of 3.5 per cent for the month.

More than half of the dozen S-Reits with industrial assets did at least as well as the iEdge S-Reit Index, while all but three outperformed the STI.

The industrial S-Reits that are also constituents of the STI – Frasers Logistics & Commercial Trust , MLT, Mapletree Industrial Trust and CapitaLand Ascendas Reit – all outpaced the benchmark index in terms of total returns.

The top performer among the S-Reits with industrial exposure was CapitaLand China Trust (CLCT), a diversified S-Reit whose China-focused portfolio mainly comprises retail assets but also includes business parks and logistics parks properties.

For the second half ended December, CLCT reported a 24.4 per cent drop in distribution per unit (DPU). Gross revenue and net property income (NPI) fell 8.6 per cent and 11.8 per cent, respectively.

While its retail malls segment was shaken by Covid-related disruptions in China, the Reit manager noted that its business parks and logistics parks segments showed positive year-on-year performance for the full year.

Another top industrial S-Reit performer was Aims Apac Reit (AA Reit), which achieved total returns of 10.5 per cent in January.

For its Q3 ended December, AA Reit recorded a 10.2 per cent increase in DPU on the back of a 14.1 per cent growth in gross revenue and a 14 per cent rise in NPI.

Despite potential macroeconomic headwinds and market volatility ahead, the Reit manager said the near-term outlook for Singapore’s industrial market will continue to be supported by favourable demand and supply dynamics.