Industrial REITs: Muted impact of 30-year lease for industrial properties.

 

Mapletree Logistics Trust (BUY/S$0.97/S$1.10)

 

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.

 

  The quick deployment of its proceeds from the recent issue of perpetual securities into higher yielding (6.2-9.9%, weighted average 7.0% net property income yield) assets should remove overhang of any potential dilution. Gearing expected to remain c.40% (it will be higher at 42.5% if we account for the perpetuals with a 50% equity credit instead, in accordance to Moody’s stricter guidelines).. The vendors are Chungbu The First Logistics Co Ltd (Jungbu Cold Warehouse), Dooil Cold Store Co Ltd and  Woosung Cold Store (Dooil Cold Warehouse). They will each lease back the property for a period of 10 years on a triple net basis, with annual escalations of 3% p.a., offering long term income stability and built-in organic growth. Initial yields are high at close to 9.5-9.9%, which we believe reflects the “cold storage” building specifications and are more costly to maintain compared to a typical dry warehouse. The acquisitions are expected to be funded from the proceeds raised from the recent perpetual securities issue. Since the start of the year, MLT has announced close to S$400m of asset purchases, which we have already factored in our estimates.Mapletree Logistics Trust (MLT) continues to expand into Korea with the proposed acquisition of 2 cold warehouses worth a total KRW 63.5bn (S$71.3m). These warehouses are located in Gyeonggi-do, the largest logistics cluster in South Korea, where close to 70% of warehouse and distribution centres are located. These warehouses are specialised, purpose-built with special chambers to handle quick freezing of food products and are well equipped to service the various stages of the cold supply chain.