Industrial REITs: Muted Impact Of 30-year Lease For Industrial Properties
• The Ministry of Trade and Industry (MTI) announced that it is halving the tenure of industrial sites under its government land sales (GLS) programme from a maximum of 60 years to a maximum of 30 years. Smaller industrial sites will see a slight increase in tenure from 19 years to 22 years.
• In addition, the government continued to boost the supply of land available for tender, releasing 23.72 ha for the 2H12 GLS, close to the 23.97 ha released in the 1H12 GLS. The total 47.69 ha of land released for 2012 is 1.4 times that for 2011.
• Near-term impact on industrial REITs muted. The impact will be muted for industrial REITs as acquisitions will continue to come from the existing stock of industrial properties with over 75-95% of industrial properties owned outside of the REITs. Our checks with industrial REITs suggest that this rule has not been extended to industrial Build-to-Suit (BTS) sites, as these sites are allocated by JTC and are assessed on their own merits. Anecdotally, the lower land tenure of 30 years has been anticipated by the market to a certain extent.
• Longer-term impact mitigated by active asset management and overseas acquisitions. In the longer term, we anticipate that industrial REITs will be more pro-active in asset management, through divestments or redevelopment of older properties, and will also look towards overseas acquisitions to mitigate the impact of shorter land leases in Singapore. New acquisitions at 30-year leases will also be priced at an estimated 50- 100bp premium over properties with 60-year leases.
• We retain our valuations for the industrial REITs. Mapletree Logistics Trust (MLT) will see the least impact on its portfolio, as MLT has 25% of its portfolio comprising freehold land with an average lease tenure of 59.4 years. Cache has the lowest land lease tenure of 39.1 years.
• Targeting speculators and rising industrial prices. With industrial property prices up 27% in 2011, and 7.3% in 1Q12, the government is addressing concerns that the rapid increase in prices and rentals is impacting the competitiveness of manufacturers and SMEs. By reducing the land tenure, MTI aims to keep industrial prices competitive for endusers, especially as JTC is no longer building new flatted factories for smaller end-users.
• Near-term impact muted as ample supply space of industrial still in private hands. Colliers International estimated that REITs accounted for less than 5% of single-user factory space and 19% of flatted factory and business park space in 2Q10. After factoring in Mapletree Industrial Trust’s (MIT) acquisition of the second tranche of JTC’s divestment portfolio in 3Q11, MIT’s market share of multi-user factories increased from 11% to 14%. With 75-95% of existing industrial space being owned outside of the REITs, industrial REITs will be able to continue making acquisitions of longer-tenure leasehold properties in the near term.
• New guidelines have not impacted industrial BTS sites as yet. Our channel checks with the industrial REITs indicate that the new rules do not as yet impact industrial BTS sites, and that they are still able to obtain leases with tenures above 30 years. Recall that there are two main avenues that the Singapore government allocates industrial land - through industrial GLS and through direct allocation to industrialists. The industrial GLS is largely targeted at smaller manufacturers, SMEs and third-party developers, whereby the land is developed for rental or sales to smaller manufacturers. For a large or strategic investment commitment to Singapore, such as the development of a BTS for Kulicke & Soffa by MIT, which had a 58-year lease, land will be directly allocated by the government based on the merits of the total investment commitment and projected value-added for the site.
• REITs with longer land leases less impacted. The impact of shorter land leases will be mitigated as industrial REITs acquire industrial properties overseas, where land leases are longer or on a freehold basis. This is evident in the land lease tenure for MLT, where only 48% of its portfolio is invested in Singapore properties and 25% of its portfolio comprises freehold land. This stretches out the land lease tenure of the entire portfolio to 59 years, the highest amongst the industrial REITs.
• In the longer term, new acquisitions will price in shorter tenures. In the longer term, new acquisitions of industrial properties will price in the shorter tenures. Our checks with the industrial REITs suggest a 50- 100bp premium for property acquisitions with below 30-year leases, as opposed to acquisitions with leases of 45 years and above.
• REITs will adopt a more active asset management strategy to manage land tenures. In contrast to a more traditional buy-and-hold model, REITs will increasingly adopt a more active asset management strategy to manage land tenures. For acquisitions, REITs typically already do not acquire properties with less than 25 years of land lease remaining. In addition, REITs are also looking at redevelopment of properties and the divestment of properties with shorter land leases in order to manage the portfolio land lease expiry.
For example, Cambridge Industrial Trust divested 7 Ubi Close in Jan 12 at S$18.7m or a 2.2% premium to its last valuation, as this property had a remaining lease tenure of 12 years. AREIT had also divested 6 Pioneer Walk in Jun 12, at S$32m, or a 36% premium on its last valuation of S$23.5m. The property had a remaining lease tenure of 24 years. AIMSAMP Industrial REIT is redeveloping 20 Gul Way, previously a single-storey factory building, into a 5-storey ramp-up warehouse, tripling the GFA to 1.16m sf and increasing rentals by more than four-fold from S$3.6m to S$16.3m when both phases are complete.
Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian Research