Data centre expansion to drive Mapletree Industrial Trust's economic resiliency

Data centres now account for 17.7% of MIT’s portfolio valuation.

Mapletree Industrial Trust’s (MIT) investment strategy to expand data centre assets beyond Singapore and reposition its portfolio towards the high-tech building segment will help it weather macroeconomic headwinds in the long run, UOB Kay Hian noted in a report.

The proportion of MIT’s high-tech building segment in its portfolio valuation doubled to 43.3% by end-2019 compared to only 18.9% five years ago, driven mostly by its increased exposure in data centres worldwide. Data centres now account for 17.7% of MIT’s portfolio valuation.

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UOB Kay Hian sees MIT’s acquisition of data centres as a positive catalyst to its stocks. The global leased data centre market is expected to grow at a CAGR of 6.5% between 2017 and 2023, driven by growth of cloud computing at CAGR of 16.1%, storage of data and content close to end-users and at multiple geographical locations for resiliency, and increasing demand for backup data centres for disaster recovery, business continuity and compliance to data sovereignty regulations.

In Singapore, the company has developed two built-to-suit (BTS) data centres at 26A Ayer Rajah Crescent and 12 Sunview Drive and has also embarked on an upgrading of a high-tech building to a data centre at 7 Tai Seng Drive (to start contributing from 3QFY20).

Also read: Singapore's data centre capacity to hit 380MW by 2022

Data from 451 Research stated that the US currently represents 32% of the global insourced and outsourced data centre space by operational sf, and MIT cemented its position in the American market with its acquisition of a 40% stake in 14 US data centres last October 2017. This portfolio reportedly has 15 quality tenants including AT&T, Vanguard, General Electric, Level 3 Communications and Equinix. Additionally, the US portfolio provides an initial NPI yield of 6.9% and rental escalation of more than 2% annually, said UOB Kay Hian.

But the real estate investment trust firm is not yet done expanding its data centre portfolio. UOB Kay Hian noted that MIT intends to acquire more data centres in gateway cities across the US, Europe and Asia. Accordingly, it is likely to partner with Mapletree Investments to pursue larger scale portfolio transactions.

In contrast, exposure to flatted factories was reduced from 48.4% to 33.1%, and is likely to reduce further as MIT also reportedly moves to redevelop the Kolam Ayer 2 Flatted Factory Cluster into a high-tech industrial precinct for $263m. When done, the redevelopment will increase the utilised plot ratio from 1.5 to 2.5 and expand GFA by 71% to 865,600sf.

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Although UOB Kay Hian believes that the redevelopment project will have a negative impact in MIT’s FY21 and FY22 as it accounts for 4% of the firm’s NLA, it is expected that the DPU will recover by 2.8% to 12.8 S cents in FY23 once it starts to contribute.

UOB Kay Hian noted that the firm is aiming to improve occupancies at the expense of negative rental reversions for the flatted factories segment, which is more affected by weakness for the electronics and precision engineering sectors.

In addition, MIT will also build a 7-storey BTS facility with GFA of 211,000sf for a global medical device company headquartered in Germany. The anchor tenant has committed to fully lease the building for 15 years with annual rental escalations. For the second block with GFA of 654,600sf, management targets high value-add and knowledge based companies from advanced manufacturing as well as information and communications technology. The redevelopment is scheduled to commence in 2H20 and is expected to complete in 2H22.