Industrial REITs displayed resilient performances. Industrial REITs have proven its defensive nature YTD, having generally outperformed both the broader REIT sector and STI. For the financial quarter ended 30 Sep, we note that all the industrial REITs had registered healthy YoY growth in their financial performances. On the operational level, they also put up a strong showing. Overall portfolio occupancy as at 30 Sep came in at a high range of 94.5-100%, relatively unchanged from 94.3-100% range in the prior quarter and 95.3-100% range seen the same periods for 2009-2010. The weighted average lease expiry (WALE) for a number of REITs had declined somewhat over the past two years. However, this is still healthy in our view as the percentage of the leases expiring is generally well spread out.
Expecting cautious stance in 2012. Going into 2012, we expect the industrial REITs to adopt a more cautious stance on their acquisition plans. The global economy, by far, has been plagued with great uncertainty, with a number of indicators biased towards a likely moderation in economic activity in 2012. In Singapore, we observe that the economy may have already been bearing the brunt from the economic malaise, with the manufacturing sector showing contraction for the fifth consecutive month in Nov. While we do not anticipate any drastic change in lessees' financial health and occupancy among the industrial landlords' rental space, we believe these developments may likely induce them to take on a more cautious stance and be more selective on their acquisition plans. On a brighter note, despite the lower expected investments, we still anticipate industrial REITs to rake up a good set of financial performance in 2012, thanks to their proactive approaches on investment/ asset enhancement activities over the past year, built-in rental escalations and possibly further positive rental reversions.
Maintain OVERWEIGHT. We continue to maintain our OVERWEIGHT view on the industrial-REITs subsector. Industrial REITs, we note, offer one of the highest DPU yields in the REIT space. This is in addition to the relative stability and earnings visibility in their portfolio, backed by longer term leases, diversified tenant base and security deposits. In addition, they now have stronger financial positions and greater access to capital, unlike the difficult times seen in the global financial crisis. We maintain our BUYs for A-REIT and MLT, and single out CACHE as the preferred pick for this subsector, due to its strong master lease arrangement, healthy leverage ratio of 30.4% and attractive DPU yield.
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Commodities Sector: Downgrade to UNDERWEIGHT - risks outweigh rewards
Gloomy global economic outlook. The International Monetary Fund (IMF) has revised down its global economic growth forecast for 2012 in its latest World Economic Outlook (WEO) report, citing renewed financial instability, driven by concerns about developments in the euro zone and the strength of global activities, especially in the US. While the IMF believes that the return to stronger activities in advanced economies is delayed rather than derailed by the turmoil, this is based on the assumption that policymakers keep their commitments and the financial turmoil does not run beyond their control. Separately, OCBC Treasury Research & Strategy (OTR) expects the global economy to decelerate further, with things getting a lot worse in 1H12 before they get better in 2H12.
Asia is likely not spared. Meanwhile, IMF also estimates that a global downturn could impact Asia-Pacific growth by 1.5-4% relative to baseline in the absence of policy responses. Already, we have seen continued weakening in China's manufacturing data as well as export numbers. In fact, the Asian Development Bank (ADB) now sees Singapore, Hong Kong and China among the worst-hit economies in the latest global economic crisis, noting that the external environment for emerging East Asia has worsened since mid-2011. Likewise, OTR notes that the previous 2008-2009 global financial crisis had highlighted the macro-financial vulnerabilities inherent in Emerging Markets (EM), including Asia.
Commodity prices could ease more. And the IMF is forecasting a continued decline in commodity prices in 2012 as the downside risks to global growth have risen; although it notes that price spikes due to supply factors remain the main concern. Meanwhile, we also note the divergence in views among the various commodity players. For example, soft commodity players such as GAR, WIL and Olam continued to maintain pretty resilient outlook, citing the defensive nature of their consumer staple businesses. However, hard commodity plays are generally more muted, especially for those dealing in industrial metals, as industrial demand/output typically slows during economic contraction. Certain agricultural commodities like rubber and cotton may also be adversely affected should people cut discretionary spending.
Downgrade to UNDERWEIGHT. Renewed weakness in the US economy and uncertainties over the EU sovereign debt issues have exacerbated the risk of the economy slipping into a "down cycle". For these reasons, Singapore has recently pared its 2012 GDP growth forecast to 1-3%, down from the expected 5% in 2011. But we could still see a faster-than-expected deterioration in the global economies, especially in China. As the looming downside risks could outweigh any potential rewards in 2012, we downgrade the sector from Neutral to UNDERWEIGHT. Our pick in the sector is Golden Agri.
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