The manager of Mapletree Logistics Trust M44U (MLT) has guided for softer leasing activity in China, citing the “uncertain market outlook”. It also expects negative rental reversions to persist over the next few quarters “as the expiring rental rates are marked to market”.
The REIT manager responded to shareholders' questions in a bourse filing on July 11, ahead of its annual general meeting on July 17.
“In China, the post-Covid economic recovery was weaker than expected with consumption and business sentiment impacted,” reads the manager’s response. “Coupled with high supply of warehouse space, this contributed to a challenging leasing environment. While the government has announced stimulus measures aimed at supporting growth and consumption, weakness in the property sector continues to dampen the outlook.”
Against this backdrop, tenants in China remain cautious, adds the manager, “with a preference not to renew leases ahead of expiries and they are committing to shorter leases”.
MLT will report its results for 1QFY2024/2025 ended June 30 after trading hours on July 24. The manager says it remains focused on achieving “stable occupancy”, and has historically maintained this figure above 90%.
As at March 31, MLT’s China portfolio registered an occupancy of 93.2%, above the country’s average occupancy rate of 78.2%.
See also: MLT announces proposed acquisition of Malaysia, Vietnam properties for $234 mil
About the tenants
According to MLT’s manager, the tenants in its China portfolio comprise mainly local e-commerce players and third-party logistics (3PL) operators serving local consumers.
In addition, the REIT manager says it has “limited exposure” to “transnational e-commerce players”.
See also: More divestments on the cards for Mapletree Logistics Trust, including asset sales to sponsor: Citi
“Looking ahead, new supply of logistics space is projected to decline in 2024 from the peak in 2023,” says the manager, citing an April report from CBRE. “This may drive a recovery of the logistics market as the supply-demand balance gradually improves.”
China vs Hong Kong
Hong Kong and China are “very different markets” in terms of supply dynamics, says MLT’s manager. “Historically, Hong Kong has had tight warehouse supply, with a compound annual growth rate of just 1% and vacancy rate below 10% over the past decade.”
In 2023, the completion of CaiNiao Smart Gateway at the Hong Kong International Airport with 4.1 million sq ft of lettable area caused Hong Kong’s vacancy rate to end 2023 higher at 7.3%.
According to independent market research by Savills Research & Consultancy, no upcoming warehouse supply is expected between 2024 and 2027, and rents are expected to see moderate growth of 0% to 5% over 2024 and 2025.
MLT’s Hong Kong portfolio delivered stable operating performance in FY2023/2024 with occupancy of 95.6% as at March 31, says MLT’s manager. “The decline in occupancy rate compared to 99.3% in FY2022/2023 was mainly due to the expiry of a lease at a single-user asset with old building specifications, which is slated for divestment.”
Macro drivers
See also: Mapletree Logistics Trust's 4QFY2023 DPU unchanged, FY2023 DPU up 2.5%
MLT’s manager says it is poised to benefit from the reconfiguration of supply chains, as businesses diversify their supply networks to reduce risk from geopolitical conflicts and the US-China trade war.
“Southeast Asia has emerged as an attractive market for businesses looking for an alternative manufacturing base. Within our markets, Vietnam, Malaysia and India are prime beneficiaries of this trend,” says the manager.
As part of its portfolio rejuvenation strategy, MLT has announced and/or completed the acquisitions of 12 modern logistics properties with an aggregate value of over $1.1 billion in FY2023/2024.
These included the acquisition of an asset in Delhi National Capital Region (NCR), India, and the acquisitions from its sponsor of an asset in Malaysia and two assets in Vietnam.
MLT’s manager says it also executed over $200 million in divestments of properties with “relatively older specifications” in FY2023/2024. “Year-to-date, we announced the divestment of another three properties with a combined value of around $37.4 million, comprising two properties from Singapore and one from Xi’an, China.”
DBS’s view
The operational challenges — especially for China, which represents 16% of net property income (NPI) — were not new, says DBS Group Research.
This has been a topic of discussion between investors in recent quarters, note analysts. “In 4Q2024, management had guided that it would take 12-15 months for its China operations to base out and recover with MLT focusing on maintaining occupancies while rents are generally expected to drop 15% through the course of the upcoming financial year ending March 31, 2025.”
DBS says concerns on the resilience of MLT’s operations in Hong Kong, at 18% of NPI has recently emerged, “but we do note that performance is likely to be stable as market vacancy rates will likely have peaked, and tenants are likely to continue renewing and maintaining their premises”.
In fact, the REIT’s other exposures — in Vietnam, Singapore, Malaysia and Australia — collectively drive 56% of MLT’s NPI, says DBS. The analysts believe this could mitigate the weakness in Hong Kong and China.
In FY2025, DBS estimates a 7% decline in distribution per unit (DPU), mainly on the back of a drop-off in fair value gains distributions and a slight weakness in JPY/SGD hedge rates.
This could bring MLT’s DPU to 8.3 cents, says DBS, 5% below consensus.
Even then, MLT’s stock is trading at 6.3%, placing it “amongst the highest of the big four industrial S-REITs”, says DBS. “Similarly there is good value in Frasers Logistics Trust (FLCT) at a yield of 7.3% with updates on backfilling on the loss of main tenant Google, which represents some 5.0% of revenue.”
As at 1.55pm, units in MLT are trading 4 cents higher, or 3.03% up, at $1.36.
