Industrial REITs: Expect rentals, capital values to appreciate further

Rentals increasing. 1Q11 started on a healthy note with manufacturing output growing by 10.5%, 4.8% and 22% YoY in Jan, Feb and March respectively. Likewise, NODX also increased 21%, 7.8% and 10% YoY respectively. The rentals for industrial space followed in tandem. According to CBRE, 1Q11 average monthly rent for island-wide industrial properties rose 3.27% QoQ and 23.4% YoY to $1.58 psf. Most of the industrial REITs also registered positive rental reversion, with the leases being renewed at a higher average rental rate during the quarter. For example, MIT saw a 15.5% positive rental reversion last quarter. A-REIT also achieved positive rental reversion of between 2.1% and 6.7% for the majority of its industrial subsectors.

Acquisition spree leading to cap rate compresion. The largest transactions for industrial properties in Singapore were all made by REIT companies. Topping the list is AREIT, which paid its sponsor S$125.6m ($316 psf based on GFA) for Neuros & Immunos at Biopolis. The transaction was completed on 1 Apr. AAREIT paid S$72m m ($147 psf based on GFA) for NorthTech, while CIT bought 4 & 6 Clementi Loop for $63.3m ($175 psf based on extended GFA). As part of the sales agreement, the seller has to expand the existing building at 4 & 6 Clementi Loop from 17,648 sm to 33,521 sm. CACHE also made its maiden purchase in Mar, snapping up 6 Changi North Way for $30.9m ($175 psf based on GFA) and 4 Penjuru Lane for $8.9m ($162 psf based on GFA). Most recently, MLT committed S$24.5m ($148 psf based on GFA) for the acquisition of Jian Huang Building. In fact, CBRE noted that the capital values for industrial properties were growing at a faster pace than rental values leading to cap rate compression in 1Q. Apart from REITs, some investors, who were priced out of the residential sector, may have invested in industrial properties instead as the latter has less stringent restrictions. This in turn helped boost demand for strata-titled industrial units.

Sanguine outlook. Most Industrial REITs guided that the outlook for industrial segment remains sanguine on the back of strong economic fundamentals, as well as the government's continued commitment to stimulate growth in the manufacturing sector. Colliers International has also forecasted industrial rents and capital values to experience a steady growth of 5%-10% for the whole of 2011. At 1.03x P/B versus a historical P/B of 1.10x, valuations remain compelling. Maintain OVERWEIGHT for the industrial-REITs subsector.

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