- Data centre (DC) S-REITs’ recent correction presents opportunities to buy “growth at attractive prices”
- Compared against DBS’s metrics, KDCREIT and DCREIT came out on top to ride on the sector’s rapid growth
- Pipelines remain crucial for REITs to tap into, as returns remain compressed due to high competition
- AREIT and MINT provide diversified exposure to a wider “new economy” spectrum but with a more steady but sustainable growth profile
Data centre-focused S-REITs’ price correction provides opportunity to buy growth at attractive prices. We believe that data centre (DC)-focused S-REITs will remain a key part of investors’ portfolios going forward. We remain convinced that DCs remain the “oil” for the digital world post COVID, with demand exceeding supply, which translates into a continuously tight transaction market with improving operating metrics. With the recent share price correction, yields for the four DC-focused S-REITs have expanded to >5.0% on average, and we see attractive re-entry points at the current levels. The market appears to have “discounted” the superior growth that our DC-focused S-REITs offer to investors, especially when selected S-REITs have significant pipelines that can be acquired from their respective sponsors over time.
KDCREIT and DCREIT stand out as our preferred plays in our value metrics. We compare the DC-focused S-REITs over seven holistic metrics covering (i) concentration risk, (ii) geographical exposure, (iii) DC type, (iv) acquisition pipeline, (v) debt headroom, (vi) valuations, and (vii) growth. Based on this scoring system we have formulated, KDCREIT and DCREIT stand out. Amongst the metrics, we believe that having sponsors that are both owners and operators will lead to both REITs acquiring operational data centres (“colocation”), which we believe translate into more sticky tenants and drive stronger earnings growth.
Data centre exposures complement AREIT’s and MINT’s “new economy-focused” portfolios. Although MINT and AREIT started out and recently pivoted into the DC space, their operational scale and diversity should be valued. We believe that their balanced exposures, including other new economy segments (logistics, IT parks, life science parks), provide myriad growth drivers for the respective REITs.
