The Positives

• Positive rental reversions across all segments in Singapore. Rental reversions on leases in 4Q19 ranged between +2.9% (high spec) and +9.7% (logistics) across the five segments. Rental reversions for the Singapore portfolio was +6.6%/+3.7% for 4Q19/FY19.
• Portfolio occupancy increased 40bps YoY despite pre-terminations and non-renewals. Portfolio occupancy increased 40bps YoY from 91.5% to 91.9%, driven by better occupancy of Singapore assets which increased 80bps YoY from 89.5% to 88.3%.

The Negatives

• Flattish rents guided for Singapore renewals. 18% of the Singapore portfolio’s GRI is up for renewal in FY20. Rents in the industrial sector appear to have bottomed out and are recovering from the high supply injected in prior years. However, management guided flattish rents for the Singapore market as passing rents are close to market rents.

Outlook

Three AEIs and a redevelopment project were announced. The redevelopment project will reposition 25 and 27 Ubi Road 4 from two light industrial assets into a one high specification industrial asset (with an enlarged floor plate). As high specification assets command higher rents than light industrial assets, repositioning the asset will allow AREIT to double rents while avoiding competing with future (light industrial) supply scheduled to come into the area. For context, market rents for high specification and light industrial asset are S$1.57 and S$3.15 psf per month respectively.

8% of the Australia portfolio’s GRI will be up for renewal in FY20, with 74% of lease expiries coming from Sydney. The rental market in Sydney is strong, having experienced 4% rental reversions for the past 12 consecutive quarters.

Downgrade to Neutral due to rich valuations; unchanged target price of $2.88

AREIT is currently trading at a rich valuation of P/NAV of 1.41x, which has crossed the +2s.d. level. We believe that such rich valuations are not well supported, given that the current rental market is more competitive with less robust rental reversions as compared to 2013 when similar valuations were last observed. 4Q12/1Q19 occupancy rate and rental index for the industrial sector were 93.7%/88% and 100/93.5 indicating a stronger market propping up valuations.

Source: Phillip Capital Research - 2 May 2019