2 reasons why industrial REITs remain attractive investments

Despite gloomy forecasts for industry rents.

Barclays Research said that it sees "opportunities for the industrial SREITs, in spite of expectations for flattish industry rents and occupancy growth rates."

It cited two reasons, the first being that valuations have come off to attractive levels on concerns of Fed tapering and rising interest rates, and it believes the market is pricing in 30-110bps higher cost of equity than we deem fair. Second, the research firm considers industrial REITs as defensive with long leases, and "could still grow inorganically."

Here's the rest of the analysis from Barclays:

We believe SREITs look generally oversold, and initiate coverage on two of the three largest industrial SREITs at Overweight: Ascendas REIT (AREIT; OW; PT S$2.58) and Mapletree Industrial Trust (MINT; OW; PT S$1.50). We also initiate coverage on Mapletree Logistics Trust (MLT; EW; PT S$1.17) at Equal Weight on its fair risk-reward. We are cautious on the Singapore business park/factory/warehouse sector, as we see demand in tandem with GDP growth offset by the 36/14/19% supply increase for the respective spaces over CY13-16E.

Supply to cap buoyant outlook: While we expect buoyant demand drivers in high value-add sectors (pharmaceuticals, media, IT, and even financial sectors in the hi-tech/business park space), and an improved trade and logistics growth outlook for the factory and warehouse space (Barclays Economist forecasts Singapore GDP growth of 2.3% in FY13 and 3.5% in FY14), we expect the 36%/14%/19% supply increase in the business park/factory/warehouse space to cap any rent increases. Key industry risks include macro downturn, high labour costs, competition, and regulatory risks.

Stress testing shows industrial SREITs look 'underpriced' by 30-110bps: Share prices of industrial SREITs have corrected 16-21% since their respective highs, as the FSTREI Index – a proxy for SREITs – is down 14% since 15 May 2013, and Singapore 10-year government bond yields have spiked 97bps to 2.44%. For the three industrial SREITs we initiate coverage on, our stress-testing shows the market pricing in 30-110bps higher cost of equity (COE) above what we believe is fair. Our COE assumptions of 7.3-7.8% assume a 3% risk-free rate (vs current 2.5%, long-term average of 2.6%) and a 6% risk premium. Fundamentally, in a growth environment, we still prefer the higher-beta office REITs – KREIT and CCT – with our stress-testing showing the market pricing in 170-180bps higher cost of equity, and they also offer more upside than industrial SREITs.

OW on AREIT, MINT: The share price of AREIT has corrected the most of the three industrial SREITs since its recent peak and is now back to 2010-11 levels. It is trading at 6.2-6.7% forward yields, a yield spread of 3.7%, and is also above its long-term historical average of 3.4%. We also like MINT, the market leader in flatted factories, as it offers the highest yield of 6.9-7.3% of the three industrial SREITs, with a still under-rented flatted factory portfolio, which could offset the near-term tenant vacancy risk.