Industrial REITs remain resilient despite industrial real estate slowdown

JTC’s latest Q2 2024 Market Report noted that industrial rents rose 1% quarter-over-quarter, the slowest growth since Q1 2022 following the post-COVID economic recovery. Year-over-year, industrial rents still rose 6.6%. Overall occupancy rates rose 0.3 percentage points to 89% as new demand continued to outpace supply growth.

Six industrial S-REITs that own significant industrial assets located in Singapore have posted mixed results in their latest round of earnings releases and business updates.

Overall, distributions per unit (DPU) were also lower year-on-year, impacted by higher borrowing costs and property operating costs – with the exception of Mapletree Industrial Trust (MIT), which declared a year-on-year increase of 1.2 per cent to 3.43 Singapore cents in DPU for Q1 of FY2024/25.

MIT’s gross revenue and net property income (NPI) for Q1 FY2024/25 increased by 2.7% and 1.3% year-on-year, respectively. The improvement was primarily attributable to revenue contributions from the Osaka data center that MIT acquired in September 2023, as well as new leases and renewals at various properties.

MIT’s portfolio occupancy rate increased from 91.4 per cent to 91.9 per cent, while Singapore saw positive rental changes, with a weighted average rent revision rate of around 9.2 per cent.

Despite the weaker performance of industrial REITs, all six REITs posted positive rental returns ranging from 2.6% to 16.8%. Sabana Industrial Reit recorded a peak rental return of 16.8 per cent, continuing its 14th consecutive quarter of positive rental returns.

Its manager continues to actively engage current tenants ahead of lease expirations and has renewed or replaced 53.5% of leases expiring in fiscal year 2024, with another 42.6% in negotiation.

The six industrial S-REITs have an average combined leverage ratio of 37 percent, which is lower than the S-REIT sector average of 39.1 percent and well below regulatory limits of up to 50 percent – ​​providing flexibility in terms of potential debt to finance capital-intensive acquisitions.

ESR-Logos Reit (E-Log) recently announced the acquisition of two facilities in Japan and Singapore for S$772.6 million, consisting of a freehold distribution centre in Nagoya and a 51% stake in a high-performance manufacturing facility in Singapore. Both acquisitions are expected to enhance E-Log’s portfolio metrics and create a resilient and future-proof green portfolio as part of its 4R strategy.

In terms of price performance, the six industrial S-REITs have seen their average total returns decline by 6.1% this year. They trade at an average price-to-book (P/B) ratio of 1x, a discount of about 11% to their five-year average P/B.

The three S-REITs that currently trade at the largest discount to their five-year average P/B multiples are: Mapletree Logistics TrustESR-Logos Reit and Sabana Industrial Reit.

(MLT) reported lower gross revenue and NPI of 0.3% and 0.9% year-over-year, respectively, mainly due to weaker results in China, a lack of income from property disposals and a weakening yen and renminbi.

In the first quarter of FY2024/2025, MLT completed the acquisitions of three modern Grade A assets in Malaysia and Vietnam from its sponsor, deepening its presence in markets that are set to benefit from structural trends of supply chain diversification and consumption growth.

The iEdge S-Reit Index has fallen 4.6% in total returns since the end of 2019, with the industrials sector as the second-best performer as a sub-segment, with 7.9% positive total returns after data centre REITs. SGX RESEARCH

The author is a research analyst at SGX. For more research and information on the Singapore REIT sector, visit sgx.com/research-education/sectors to view the monthly S-Reits & Property Trusts Chartbook.