- Industrial S-REITs remain the choice sector given their multi-year pivot into new economy assets
- Close to 90% of AUM are now invested into new economy industrial asset classes that exhibit robust growth and capital upside.
- Pipelines are even more important for REITs to gain access and grow
- Prefer A-REIT, FLCT and MLT, and mid-cap industrial REITS like ALLT and EREIT
Industrial S-REITs are the “new economy” plays. Investors have often baulked at the industrial S-REITs’ tight yields of c.5.7% (4.5% for large caps) but we believe that this premium is justified. With the sector’s earnings resilience proven during the COVID-19 recession and with economies re-opening, we believe that sector remains on a firm footing to deliver decent growth of more than 3% CAGR over FY21-23F. Our preference is to for investors to invest alongside structural growth trends within the new economy assets of logistics, data centres and business parks, which we believe will deliver a potent mix of growth, capital upside. Picks, MLT, FLCT, AREIT, ALLT and EREIT.
Sponsor’s role in shaping an acquisition pipeline crucial in Industrial REITs’ continued pivot to new economy assets. Industrial REITs have been actively growing their portfolios in recent years, with more than S$6.7bn announced and completed YTD, which now contribute close to 90% of assets. However, with competition from funds, returns are increasingly looking compressed and as such, sponsor’s pipeline and ability to kick-start greenfield or brownfield developments will be an edge going forward. Amongst the S-REITs, we remain most attracted to FLCT, MLT and AREIT for their continued access to pipelines that can potentially grow their AUM by 13%-40% while redevelopments to rejuvenate some of their ageing assets will offer added upside to NAVs.
Time for large cap industrial S-REITs to reclaim their stage. With the average yield spreads between large and mid-cap industrial S-REITs converging to a 5-year average spread of c.2.1%, partly due to the latter’s share price strength due to news of EPRA NAREIT indexation. Looking ahead, we believe investors will refocus on ability to drive sustainable growth and expect that large cap S-REITs, especially those with pipelines to see relative superior returns.