Most punitive on industrial REITs. Following our sector report on 6 Dec 2013, the overall S-REITs market has tanked 2.7% with industrial REITs bearing the brunt – down 3.4% in five days (Figure 1). This segment saw correction across the board, with large-caps counters like A-REIT, MLT and MIT falling 2.9-3.7% over the period. Neither were the smaller caps spared – AAREIT/CACHE/SSREIT fell more than 4%.

Why industrial property prices jumped twofold in four years. Some clients have queried why industrial property prices were allowed to escalate to such high levels in the past 4-5 years post-GFC. We believe this was unintended and the reasons could be as follows:

1. Following eight rounds of residential cooling measures since 14 Sep 2009, a lot of the “hot” money flowed into industrial properties, especially those that were strata-titled and overextended their allowable use (eg, pseudo-office/residential usage).

2. Residential, office and retail land parcels have traditionally been under the purview of the more “socially-inclined” Urban Redevelopment Authority, whereas the key agency for industrial land is Jurong Town Council (JTC), which tends to be more "economic-driven". The industrial cooling measures enacted thus far have proven to be more muted compared to the residential segment (perhaps it carries more far-reaching social implications). Of course, the fact that five out of nine industrial REITs got listed from 2010-2013 (after the GFC) did not help matters.

Recent cooling policies seem “capital-preservation” oriented. We note that unlike the measures in 2011-2012, which were geared towards curbing speculation and making industrial properties more affordable for genuine industrialists, the measures by IRAS and JTC in 2013 have been designed to lock in land lessees and anchor tenants for longer periods. They may be aimed at preventing massive selling by asset owners and vacating-in-droves by tenants, thus slowing down the ensuing hard-hitting effects on capital values. Given that industrial prices have doubled in the past four years, we do not rule out more forceful measures in 2014 should prices continue to climb.

Interest cover tells part of the story. In his report today, our banking analyst Ng Wee Siang highlighted that the median interest coverage ratio of the manufacturing sector is now at a GFC-low and that this sector appears most vulnerable in the event of an economic slippage given its weaker financials. This is in stark contrast to most industrial landlords, which have benefitted from low interest rates and higher rentals (Figures 3 and 4: interest cover above GFC levels). This reaffirms our view that industrial and warehouse rentals are probably toppish and will likely moderate in 2014-2015.

Sector calls. We remain most downbeat (Underweight) on the industrial REITs segment and are Neutral on retail, office and hospitality REITs (preference in that order). We have SELL calls for CACHE (TP: SGD1.05) and MLT (SGD1.00). Our only top BUY is Suntec REIT, whose DPU CAGR of 17.8% over 2013-2015 should provide buffer in the event of a property price drop in a rising interest rate/expanding cap rate environment. Continue to Underweight the overall sector.  

Source: Maybank Kim Eng Research - 13 Dec 2013