- Oversupply concerns persist but warehouse and business parks segment will continue to shine
- Pivot to new economy asset classes have benefited industrial S-REITs
- Time to embark on “recycle, redevelop, and reposition” as the next leg of value-accretive strategies
- Top picks are FLCT, MINT, and KDCREIT
Warehouse and Business Parks sector to outperform in FY22. Labour shortage in the construction sector led to delays in completion of new industrial space, pushing deliveries into 2022. As such, we anticipate a record 2.2–2.4m sqft of completion next year, an overhang on growth outlook. Amongst the various sub-asset classes, we like the high-specification factory, logistics, and business park segments given that they cater to industries in the new economy space, which are expanding their footprints. We are cautious on the multiple-user factory space as pressure on occupancy and rental rates is expected to build up with new supply entering the market.
Pivot to new economy assets have benefited industrial S-REITs, time for “recycle, redevelop, and reposition” assets to drive returns.Industrial S-REITs pivot towards new economy assets have paid off as they continue to demonstrate their resilience throughout the COVID-19 pandemic. With robust cap rate compression on their books, this has raised NAVs. With the growth of the logistics, technology, biomedical, and life-science sectors, we expect the new economy assets to remain in focus. While sponsor’s pipelines remain a good source of acquisition opportunities, returns from income-producing assets are low, making it difficult to drive meaningful accretion. As such, we believe that most will switch strategies, seeking more development or “turn-around” opportunities in order to deliver value-accretive returns to unitholders. With experience in managing assets and support from sponsors, we believe that investors will embrace this new strategy.
Attractive growth prospects. Industrial REITS have been resilient throughout the COVID-19 pandemic, having ramped up their acquisitions over the past two years. As such, industrial REITs are projected to report a strong FY22F DPU growth of c.3.1%, higher than the historical average of c.2.1%. We like REITs which have the ability to surprise on acquisitions or embark on development projects to drive earnings and NAV growth. We pick FLCT, KDCREIT, and MINT.