Industrial REITs will see minimal earnings risk till 2015: DBS

Don't worry, reversions will remain positive.

Industrial REITs may be facing operational challenges what with a signifcant supply of new industrial space in the pipeline, but DBS Vickers reckons the sector will be able to overcome these challenges.

The research firm predicts minimal earnings risks for industrial REITs as it expects rental reversions to remain positive.

"We expect landlords to be realistic in their rental expectations and thus, retention rates should remain fairly high. Rental reversions are likely to remain positive, buffered by low expiring rents which are estimated to be c.7-15% below market levels," said DBS Vickers.

"As such, we believe that earnings risk is minimal and forecast industrial REITs to deliver FY13F-15F DPU growth of c.3%," it added.

Here's the full sector analysis from DBS Vickers:

Challenges ahead given significant supply outlook. The industrial sector performed better than expected in 2013, as demand growth kept up with supply completions. As a result, rental and capital values inched up, albeit at a more moderate rate of 5-7%. Looking ahead, we see outlook turning modest, owing to a significant supply pipeline of 51.8m sqft (+12% supply expansion) of industrial space currently under construction/planning, which is projected to be completed over 4Q2013-2015.

Growing demand and high pre-commitments to limit downside in rents. While supply growth is significant, we believe that earnings downside is mitigated by an estimated c.70% of the space already pre-committed or to be filled given a brighter economic outlook. Demand for space will likely come from firms looking to consolidate or expand operations to a single base, with an aim to improve production efficiency. In addition, firms that invested significantly in capex are also likely to prefer to renew leases. This is expected to limit declines in spot rents to c.3-5% over 2014-2015, amid a 2-ppt rise in vacancy rates.

Industrial landlords see minimal earnings risks as reversions to remain positive. We expect landlords to be realistic in their rental expectations and thus, retention rates should remain fairly high. Rental reversions are likely to remain positive, buffered by low expiring rents which are estimated to be c.7-15% below market levels. As such, we believe that earnings risk is minimal and forecast industrial REITs to deliver FY13F-15F DPU growth of c.3%.

Acquisition growth to moderate. On the inorganic growth front, competition for assets to remain with eight listed industrial REITs, while recent new policy measures by JTC to tighten selling restrictions for industrialists and REITs meaning that the pool of investable assets will shrink but transactions, if any, will be of stronger asset and tenant quality. Industrial REITs are likely to focus on development or asset enhancement activities to optimize returns.

An eye on growth. Across the industrial REITs, we expect MINT to deliver higher growths of 5% CAGR over FY13-15F (vs secto’s average of 3%) . Cache continues to offer visible and high yields of close to 8.2%-8.5%.