Acquisitions will lift industrial S-REITs in 2020: analyst

Its AUM expansion rate could hit 6%.

Acquisitions will be the growth machine of industrial S-REITs for 2020, with around $1.6b to $2b worth of deals expected for the year, according to a report by DBS Group Research.

As a result, industrial S-REITs could have an overall asset under management (AUM) expansion rate of up to 6%.

The report further noted that large-cap industrial S-REITs are trading at multi-year highs. The industrial REITs are on average trading at a 1.53x P/NAV and a sub-sector yield of 5.9%, with the larger-cap REITs trading at a tighter estimate of 3.5-4.8% yield, whilst the other mid-cap S-REITs average 7.3%.

“The distinction between the large caps and mid caps are now the widest we have seen as investors focus on the larger names for their liquidity, scale and ability to deliver acquisitions accretively,” said DBS analyst Derek Tan.

For 2019, dividend yields of large-cap industrial REITs was at c.4.3%, showing that it compressed and are trading at their historical lows. Meanwhile, mid-cap industrial REITs are trading at the upper bound of their historical average yields and we there could have room for yield compression.

In addition, DBS stated that investors are pricing in too much growth in valuations Than what S-REITs can potentially deliver, especially the larger-cap S-REITs. “Whilst the low interest rate environment lends support to acquiring for growth, we believe that the ability to find accretive acquisitions is easier than buying value in the current operating climate."

DBS also noted that business parks and warehouses will lead the gradual recovery of the sector and that the impact from COVID-19 will not likely be a major concern for landlords but a prolonged slowdown in business activity levels would hit consumer-related and ecommerce plays in China/Hong Kong first, whilst most Singapore tenants remain cautious.

“We believe that the outlook for Singapore’s industrial sector will remain stable in the immediate term with a slight increase in 2019 as it started to bottom out from 2018 onwards on the back of abating supply risk,” it added.