AREIT raised S$393m in March 2011 for potential acquisitions

Acquisition outlook
We believe the raising of S$393m in Mar 11 could be indicative of a more visible acquisition pipeline this year, with a low gearing of about 32-33% offering debt headroom of more than S$700m (to a 40% gearing) for debt-funded purchases, after Mapletree Business City factoring in its recent site acquisition at Fusionopolis.

Chinese ventures remain a mid-term strategy. AREIT made its first overseas acquisition with the purchase of a Shanghai business-space development project in February this year. While an overseas footprint could increase risks, we believe contributions to AREIT’s S$5.4bn asset base should remain low in the near term.

Cognizant of increased risks associated with going overseas, management stresses its prudence towards investments in China and says its China ventures should remain a mid-term strategy. Management also intends to focus only on Tier-1 cities like Shanghai and Beijing and business-park space, which it believes is a comparatively untapped niche in China.

Still good opportunities locally. The local pipeline could come from JTC’s divestment of two tranches of ready-built industrial facilities this year. AREIT has submitted bids for both tranches and we believe the results could be released by 3Q this year. Comprising 15 flatted factories, six amenity centres and 1,749 car-park lots, the value of the two portfolios is estimated at S$600m-700m.

While we believe this is not a key asset class which AREIT is eager to get into, the portfolios could be attractive for their stable income and potential for higher rental reversions. Overall occupancy is high at an estimated 96% while rents (likely similar to the previous portfolio acquired by Mapletree Industrial Trust) are expected to be 20-30% below market. We estimate that a successful bid of one tranche (estimated at S$300m at an NPI yield of 7%) could nudge DPU up by about 2%, assuming full debt funding at an average borrowing cost of 3.5%.

Meanwhile, though industrial cap rates have been compressed by increased competition for assets, the spreads between cap rates and cheap funding rates still leave room for DPU-accretive purchases, unlike the other asset classes. More bitesized industrial assets, the stable nature of industrial assets and AREIT’s large asset base also leave it with the room to undertake development projects for enhanced yields, both in meeting the 10% development cap and the capacity to stomach additional development risks.

This is particularly so in the business-park space where AREIT is keen to defend and increase its market share. Beyond greenfield developments and third-party acquisitions, AREIT also has rights of first refusal (ROFR) to sponsor Ascendas Group’s local business parks and other industrial assets.