RHB Group Research analysts Loong Kok Wen and Vijay Natarajan have maintained their “overweight” call on the industrial S-REIT sector and “neutral” call on the industrial M-REIT sector.
Their top picks are Capitaland Ascendas REIT, ESR-Logos REIT and AIMS APAC REIT in Singapore, and Axis REIT in Malaysia.
All of these picks have “buy” calls, with target prices of $3.60, 53 cents and $1.66 respectively for the S-REITs, and RM2.19 ($0.67) for Axis REIT.
In an Oct 4 report, Loong and Natarajan note that average yields for industrial S-REITs and M-REITs are now at 7.4% and 5.7% respectively, adding that the 12-13% premium to the average sector yield indicates “robust interest” among the investment fraternity and a “positive outlook” for the industrial sector in the region.
However, they feel that as the manufacturing sector gradually evolves to what is called “Industry 5.0” and emerging new economy industries, they prefer industrial REITs that have quality industrial assets with sustainability features, apart from being at strategic locations.
Industry 5.0, Loong and Natarajan write, connects humans and machines in manufacturing processes and the logistics chain, highlighting that Singapore is one of the countries in Southeast Asia that saw the highest number of industrial robot installations over the past few years.
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Malaysia, on the other hand, recorded double-digit growth in this area, but the analysts say it was “at a much slower pace”.
Nonetheless, as a result of this, there will be an increase in high value-add jobs created in both countries, which will be “particularly crucial” when the region is facing severe labour constraints post-pandemic.
Loong and Natarajan say that while the number of workers required for a manufacturing plant may be reduced, the demand for factory floor space may not necessarily be lowered as additional space may be required especially after the Covid-19 pandemic.
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This space may be needed for alterations in the supply chain, inventories and facilities needed for repair, as well as installation or modification of the robots over time.
Given all these factors, they point out that industrial REIT players will need to upkeep asset quality to stay competitive, adding that they expect many REIT players and asset owners to upgrade their existing properties by incorporating new features so that their assets can keep up with market demand.
They particularly highlight Axis REIT in Malaysia, saying that while some industrial S-REIT players are busy repositioning their assets to capture the demand from new economy industries, Axis REIT has started to embark on developing more modern industrial facilities.
The REIT has been providing flexibility in the warehouse space of its greenfield development projects, so that it can cater to the demand of a different scale.
RHB has “buy” calls on 10 out of 14 S-REITs, and two out of seven M-REITs.
