Logistics, industrial Reits best-placed to weather economic slowdown: Fitch Ratings 

Michelle Zhu
Published Thu, Sep 1, 2022 · 02:43 PM

REAL estate investment trusts (Reits) in the logistics and industrial spaces are the most resilient against rising inflation and interest rates amid an expected economic slowdown in 2023, according to Fitch Ratings.

In a report issued Thursday (Sep 1), the credit ratings agency said logistics Reits such as Mapletree Logistics Trust : M44U 0% (MLT) would continue to benefit from industry tailwinds such as rising e-commerce adoption, the reshoring of supply chains and inventory stockpiling. 

“MLT has a lower exposure to rising electricity costs compared with most rated peers as the tenants bear a large part of the utility costs, while warehouses generally have lower energy usage than most other commercial-property types,” noted the analysts. 

The agency forecast the trust to undertake about S$2 billion worth of acquisitions in FY2023. It is also expected to maintain an occupancy of around 95 per cent in the next 12 to 18 months. 

Analysts of Fitch Ratings said industrial Reits with exposure to high-tech buildings and data centres will be “somewhat shielded” against an environment of slowing economic growth, due to their long leases to large corporate tenants. 

“Occupancy and rental reversion for industrial assets leased to SME (small and medium-sized enterprises) tenants will come under pressure from slowing economic growth, but the impact on rated Reits is mitigated by their modest exposure to these properties,” they stated. 

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One such example is Mapletree Industrial Trust : ME8U 0% (MIT), as Fitch Ratings expects it to maintain the majority of its exposure to powered-shell assets. According to its analysts, such assets would help to mitigate risks associated with the limited alternative uses of fitted and hyperscale data centres, especially in the event where its tenants could face technology obsolescence over the long term. 

Although MIT’s Ebitda (earnings before interest, taxes, depreciation and amortisation) margins are forecast to narrow in FY2023 and FY2024 on rising electricity costs, Fitch Ratings believes the trust will be able to mitigate this impact and maintain a “solid financial profile”. Its analysts continue to like the trust for its manageable exposure to rising interest rates and limited debt maturities in the next 12 months. 

On the other hand, Fitch Ratings believes hospitality Reits are most at risk to an economic slowdown due to their low rating headroom and still-recovering credit profiles. 

The agency however expects their operating cash flows and balance-sheet buffers to improve in the near term from pent-up travel demand as Singapore continues to reopen progressively. 

It has highlighted Ascott Reit : HMN 0%as a potential beneficiary of the anticipated industry recovery given its rapid diversification into longer-stay assets that would boost the trust’s cash flow diversity, in Fitch Ratings’ view. 

“We believe the Reit’s Ebitda interest cover will remain healthy, recovering to about 4 times in 2022 and 4.3 times in 2023 on rising cash flows (compared to 2.8 times in 2021), notwithstanding the rising interest-rate environment,” said its analysts.

While the agency is projecting a “sharp recovery” for retail-focused Reits, it cautioned that those with exposure to prime retail malls - such as Starhill Global Reit : P40U 0% - will take longer to reach pre-pandemic earnings than its suburban peers. This comes as the number of visitors from the industry’s key inbound market, China, remains low.

Reits whose retail assets are undergoing significant asset enhancement initiatives are also expected to face muted operating cash flow growth in the near term.

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