The good times are over for industrial REITs

High supply and limited demand are key risks.

The good times may finally be drawing to a close for industrial REITs, after enjoying three consecutive years of double-digit revenue growth.

A report by CIMB stated that industrial REITs have limited room for further positive rental reversions. In the past three years, rental indices for the different types of industrial properties have rebounded to pre-GFC levels on the back of a lack of supply, and strength of the manufacturing production index (MPI) gaining strength.

These two factors will be absent this year, what with the MPI forecasted to only grow from around 1-2% while supply will be high, averaging 7.1m sq ft p.a. for single-user factory space, 5.7m sq ft for multi-user factory space, 5.7m sq ft for warehouses, and 1.7m sq ft for business park space in 2015-2016.

“As such, we believe the room for further positive rental growth could be suppressed. In addition, with passing rents for industrial REITs’ properties mostly marked to market, the lack of decent growth in the headline rents in this sector could limit the room for higher rental rates when leases are due for renewal in the coming quarters,” stated CIMB.

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