Industrial REITs unlikely to sustain rental growth in 2014

Business parks the only bright spot.

In its 2014 outlook for industrial REITs, OCBC Investment Research is adopting a cautious view on the subsector.

While the rental market has essentially been on an uptrend since the trough in 3Q09, the research firm said it is skeptical of the sustainability of the growth momentum in the factory and warehouse market.

It pointed to how leasing enquiries for factory space has tapered, according to property consultant CBRE, as well as how the influx of factory and warehouse supply from 2013-2016 is expected to cap the growth in rents or even exert downward pressures.

"We maintain our view that the industrial property rents, on the whole, will remain stable in 2013, while rents in 2014 may likely be flat to slightly downside biased," said OCBC.

"We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive," it added.

OCBC pointed to Singapore warehouse and factory prices recently witnessing another set of record highs in 3Q13. The Singapore government has also been imposing a number of cooling measures over the year.

"All these developments serve to dampen the market sentiment and transaction activity in our view, as industrial REITs are likely to be more selective on their acquisition targets," said OCBC.

"On a more positive note, demand for business park space has held steady in 3Q13 and is likely to remain positive in the short to medium term, with potential upside in the rents over the next 6-12 months," said OCBC.

The research firm noted that more industrial REITs are turning to asset enhancement initiatives and redevelopments to grow their income, which should help cushion the decline.

Among the industrial REITs, OCBC chose Ascendas REIT and Cache Logistics Trust as its preferred investment picks due to their strong earnings visibility, robust financial position and compelling yields.