September 11, 2019

Ascendas REIT (AREIT) is better able to weather the uncertainties created by escalation in trade conflict due to its focus on business parks and high-specification buildings, where rents were on a gradual uptrend (53% of portfolio valuation). It continues to create value through developing Grab’s new HQ at one-north and a high-specification building at 25 & 27 Ubi Road 4. AREIT provides a 2020F distribution yield of 5.2%.

2.5m sf of new business park spaces is expected to come on stream in 2019-20, representing 10.5% of total stock. 59% of the new supply for business parks in 2020 and 2021 is already pre-committed. In particular, three of the six projects completing in 2020 are built-to-suit (BTS) to serve as headquarters for Grab, Razer and PBA Group. Rents for business parks were stable at S$5.80psf pm for the city fringe and S$3.80psf pm for the rest of the island in 2Q19, supported by limited supply of multi-tenant buildings. Similarly, 5.0m sf of new high-specification industrial spaces is expected to come on stream in 2019-21, all of which are fully committed. Rents for high-specification industrial buildings increased 4.8% yoy to S$3.30psf pm in 2Q19.

AREIT achieved positive rental reversion of +2.7% for renewed leases at multi-tenant buildings in 1QFY19 (Singapore: +3.0% and Australian: +0.2%). For Singapore, rental reversions were driven by business & science parks (+3.7%) and high-specification industrial & data centres (+3.3%). Management expects rental reversion to be flat in FY19 due to macro uncertainties and excessive supply of light industrial properties (8% of portfolio valuation).

AREIT will develop a BTS building located at one-north business park to serve as Grab’s new headquarters. Grab will lease the building for 11 years with the option to renew for another five years. The lease has built-in annual rental escalations. Total development cost is S$181.2m while initial NPI yield is estimated at 6.4%. The building will have a total GFA of 455,421 sf, and is expected to be completed by 3QFY19. Maintain HOLD. Our target price of S$3.25 is based on DDM (required rate of return: 6.5%, terminal growth: 1.5%).  – UOB KayHian

Ascendas REIT closed at: S$3.15.