■ Three manufacturing indicators pointing towards a contracted quarter.
■ Weaker demand for space and impending supply would result in rents easing further.
■ Expect a soft 3Q CY15 for the Industrial S-REITs.
What is the news?
■ Based on advanced GDP estimates released today, Singapore has averted slipping into a technical recession. However, key manufacturing indicators for 3Q 2015 that have been released to date show weakening industrial activity.
■ JTC has revised its subletting policy with effect from 1 October 2015, lowering the required minimum GFA for anchor subtenants to 1,000 sqm from 1,500 sqm. (Source: JTC: Policies for Third-Party Facility Providers)
What do we think?
■ Relaxation of anchor tenant rule suggests that JTC is cognisant of the pressures faced by landlords. JTC had "received feedback that many quality anchor subtenants require smaller spaces than the minimum space quantum specified". Relaxation of the rule allows more quality industrialists to qualify as anchor subtenants, thereby alleviating landlords' woes of maintaining occupancy.
■ Cost-sensitive industrialists unlikely to have gone on an expansion spree; sector-wide occupancy could be lower this quarter. Evidence of the weaker manufacturing activity in the quarter, and the uncertainty in the global macro economy should have weighed against industrialists' sentiments; and prevented them from aggressively committing to additional space. Tenants with lease expiries during the quarter may have opted for smaller spaces or even decided not to renew.
■ Rents are expected to continue easing in 3Q15; this is nothing new. We would be keen to see the holding power of landlords and their ability to maintain rent levels. We think that rents for new assets as well as Business Parks & High-specs buildings to hold up better compared to the rest of the sub-sector. Do refer to pages 5 & 6 of our previous report (29 July 2015), to view the lease expiry profiles of the various Industrial S-REITs with significant portfolio exposure to the Singapore industrial land supply-demand dynamics.
Apart from the effects from the organic rental reversions and rent incentives, y-o-y DPU sustainability in this quarter will be also affected by the following factors:
■ Downtime due to conversions from master-leases to multi-tenanted leases.
■ Completed AEIs, BTS projects, or contributions from acquisitions to stabilise DPU.
■ Business Park spaces will be in short supply as there are no new spaces coming onstream after 2016, resulting in higher rent. (Soilbuild Business Space REIT: Accumulate; Report)
■ Cache remains the best proxy to Singapore's Logistics Hub status. Its valuation is currently close to historical lows. (Cache Logistics Trust: Accumulate; Report) (Read Report)
Source : Phillip Securities Research