A-REIT - Going Down Under or Deutsche?

AREIT announced that it was actively exploring investment opportunities in mature developed markets (including Australia and Germany), which could account for 20-30% of its portfolio. We are not surprised given Singapore’s limited growth outlook. While we expect AREIT to adopt a measured approach, the pace of expansion could be quicker than in China given its stronger balance sheet today and the weaker currencies in the two mentioned markets.

Incidentally, Ascendas (AREIT’s sponsor/parent) emerged as the preferred bidder for GIC’s industrial portfolio in Australia, according to AFR and Bloomberg. The bid price of A$1.1B implies a yield of just over 6%. The portfolio is primarily Grade A industrial with long WALE. AREIT continues to be our top large-cap SREIT pick, given its strong DPU growth of 5.5%, sizeable exposure (70%) to the business park/science park/hi-tech space where supply-demand dynamics remain healthy, under-rented portfolio, and improving occupancies. Maintain OW.

· Extends investment mandate
After market close this evening, AREIT announced that it was actively exploring investment opportunities in mature developed markets. AREIT plans to expand its investment scope to cover new mature developed markets (such as Australia and Germany), which provides diversification and strengthens its portfolio. AREIT’s portfolio will remain predominantly Singapore-based in the foreseeable future, with the new markets expected to account for 20-30% of its portfolio, i.e. S$1.6-2.5B. We note that AREIT provided similar guidance during its 1Q FY16 results, although no countries were cited.

· Not entirely surprised
We are not surprised at AREIT’s decision, given Singapore’s limited medium-to-long-term growth outlook and stringent government regulations, as well as supply pressures within the factory and logistics sub-sectors. However, we note that 70% of its existing AUM is exposed to business & science parks, hi-tech space and data centers, where demand-supply dynamics are the healthiest among the industrial sector. Furthermore, its sponsor’s sizeable pipeline of S$2B (largely business & science parks) could still be injected.

· Measured approach
We expect AREIT to adopt a measured approach, although the pace of expansion could be quicker than in China (where it only acquired three properties - 5% of AUM, despite an early entrance in 2011) given China’s less developed industrial sector vs. Australia’s and Germany’s. Furthermore, the weakening currencies in these two markets could be an opportunity for AREIT to purchase at a competitive price. Compared to four years ago, AREIT’s balance sheet is also stronger, with current gearing of 34.7% implying ample debt headroom of S$0.7-1.5B for acquisitions before hitting 40-45%.

· Ascendas (AREIT’s sponsor/parent) is the preferred bidder for GIC’s industrial portfolio in Australia, according to Australian Financial Review (AFR) and Bloomberg this afternoon. Bid price of A$1.1B implies a yield of just over 6%. Covering NLA of over 600,000sqm in major capital markets in key logistics areas, the assets are leased to major corporates such as Wesfarmers, Kmart and Pacific Brands. Other bidders include Blackstone, Ivanhoe Cambridge/Logos and Warburg Pincus/The Redwood Group. According to our Australia property analyst, Richard Jones, the GIC portfolio comprises Sydney, Melbourne and Brisbane of A- and B-grade assets with a WALE of five years. He notes that market sentiment reflects a yield of 6.25-6.5% and estimates that book value (as at 31-Dec-14) reflects a yield of 7.25%, which is consistent with MGR’s 10 Interchange Drive at Eastern Creek and DXS’s 28 Distribution Drive at Laverton North, both new builds with 5.5-year WALEs and held at similar yields currently. In Jun-15, Mapletree Logistics Trust acquired Coles Chilled Distribution Centre in Sydney for a 5.6% yield, while Cache Logistics Trust acquired three industrial properties in Australia for a 7.3% yield.


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· Maintain OW
AREIT continues to be our top large-cap SREIT pick, given its strong DPU growth of 5.5%, sizeable exposure (70%) to the business park/science park/hi-tech space where supply-demand dynamics remain healthy, under-rented portfolio, and improving occupancies. While the group’s potential entry into new developed markets is not surprising given the limited medium-to-long-term growth outlook in Singapore, we expect AREIT to adopt a measured approach. Maintain OW. (Read Report)

Source : JP Morgan Asia Pacific Equity Research

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