Business Park exposure not fatal. AREIT’s business/science park portfolio constitutes 38% of our FY3/14 GAV and gross revenue. We noted that there is an onslaught of ~7m sqft of new known supply in 2012-2015. The majority of this supply (~81%) is in the central region (One North and Mapletree Business City), where AREIT has ten out of 23 properties. According to our estimates, the central region assets comprises ~40% of AREIT’s business park revenue and NLA. Predominantly, AREITs business park portfolio (~60%) is still concentrated in the east and west region, namely the International Business Park (IBP) and Changi Business Park (CBP).

More than 50% supply pre-committed. In addition, we estimate that ~60% of the impending supply is already pre-committed. Most of the available space will also be catered for specific uses and hence limit the choices available for existing occupiers. The Singapore government is committed to provide incentives to attract established MNCs to Singapore, and this will stabilize occupancy in our opinion. At 94% occupancy (as of 30 Sep) for business park with mostly MNC tenants, we think AREIT stands in good stead with its East+West concentrated business park portfolio and remain confident that it will be able to lease out its upcoming Nexus@onenorth project (complete in 3Q12, 223k sqft) in due course.

New Asset Enhancement Initiatives and Developments to drive growth. The former Aztech Building and Ultro Building are undergoing refurbishment works till 2Q13 and 4Q13 respectively. We forecast rental upside of 117% for Aztech (SGD 2.73 psf/mth from SGD1.25 psf/mth) and 56% for Ultro (SGD3.90 psf/mth from SGD2.50 psf/mth on completion). We expect existing developments (Unilever Four Acres, Nexus@one-north) and AEI works (Freight Links, Xilin, TechPlace II) to be the main growth driver for AREIT in 2013.

Yields can be compressed by another 60bps. We continue to like AREIT for its stable DPU yield, healthy lease expiry (not more than 25.5% of income expiring per annum) and debt maturity profile (not more than SGD400m maturing per annum). In addition, only 19.8% of AREIT’s NLA is used for conventional manufacturing, which is a plus given that the per annum net demand for factory space has been modest compared to warehouses and business parks. From our estimates, the implied cap rate for AREIT is 5.5%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe that yields can be further compressed by another ~60bps from our forecasted FY3/14 DPU of 6%. Reiterate BUY with a DDM-derived TP of SGD2.60.

Source: Maybank Kim Eng Research - 18 Dec 2012