Reinventing industrial REITs
Joseph Wong 

Industrial real estate investment trust (REIT) is still an overlooked sector despite Malaysia’s industrial production index (IPI) showing positive growth amid a sluggish property market.

The IPI was higher by 4.2% year-on-year as of October 2018 with its growth supported by higher output in the manufacturing and electrical sectors.

Area Management Sdn Bhd (Area) executive chairman Datuk Stewart LaBrooy believes that industrial REITs are the ultimate defensive property stock for property investors.

He points out several positives for the sector and trends going forward.

“The stock availability is still tight [showing that this is] a highly underinvested sector,” he says at a property seminar recently.

However, LaBrooy tells FocusM that there is a need to reinvent the industrial real estate offerings in the country.

"We need to take advantage of the coming wave of investments arising from the Belt and Road Initiative by China as well as multinationals diversifying their operations to Malaysia to reduce any risk arising from any impending trade wars. We need to be ready with the products," he says.

"Malaysia has lagged in its logistics development but with the spectacular growth of e-commerce, rising cold chain demand, and the retail industry seeking 'bricks and clicks' strategy plus the multinational companies demanding Grade A warehousing for their operations, it is becoming very apparent that there will emerge a critical shortage of new modern logistics warehouses,” he foresees.

Last year, Area announced an inner-city distribution hub in Kuala Lumpur. The warehouse with a built-up of about 1.2 million sq ft will be located in Ampang.

This is to tap into the exponential growth of e-commerce, especially online shopping, that has become a boon for logistics companies in the region, including Malaysia.

However, the ever-increasing demand for speedy delivery of goods to the consumer places the onus on couriers to open warehouses and distribution hubs within city limits or the periphery.

“Not until DHL Express built its one million sq ft facility in Shah Alam four years ago was there any warehouse of such a size, with only a couple with a size of 800,000 sq ft,” says Labrooy.

“It all comes down to customer expectations for same-day delivery. Having a distribution hub 10 to 20 minutes from your customer and having a stocking point that close makes a lot of sense.

“As e-commerce sees increasing automation and a drive for same-day delivery, e-commerce companies will see the need for fulfilment centres to be available as close as possible to their customer base,” he told FocusM in an earlier interview.

The higher demand for more industrial units has pushed the rental rates for them.

According to LaBrooy, the rentals for industrial units have been rising over the past two years and have recorded increases of up to 30%.

He adds that industrial land prices have been climbing, leading to the introduction of new and innovative multi-level industrial properties.

“There are exciting mega distribution centres being built which will carry high price tags. And with e-commerce driving demand and supply, more such industrial properties are likely to emerge in the future,” he says.

LaBrooy points out that the larger distribution centres will carry sticker prices of RM400 mil to RM500 mil, and provide industrial REITs with an opportunity to find scale and liquidity.

Since rentals will be higher, this in turn will provide higher yields of 7% or more with long lease agreements and stable revenues, he says.

Bigger pool of assets

New industrial parks will provide industrial REITs with a bigger pool of assets to select their acquisitions, he adds.

As it is, Selangor, which is the gateway to the Asean market given its strategic location with well-developed infrastructure and pool of skilled labour, had the highest number of approved manufacturing projects, 83 in total, for the January to June 2018 period, says international real estate consultancy Knight Frank Malaysia.

“The state was ranked 3rd in terms of proposed capital investment with RM3.10 bil,” it says.

In total, there were 840 industrial property transactions worth RM4.45 bil recorded in the first half of 2018.

This is a sharp increase of 16.2% in transaction volume and 70.1% in transacted value respectively from 1H17 where there were 723 transactions worth RM2.61 bil.

The positive trend has also prompted REIT managers to develop their own properties.

In fact, Area and PNB Development Sdn Bhd inked an agreement last year for the purchase of a 86ha parcel of land in Selangor for RM320 mil.

Area, through its special purpose vehicle AIDF Industrial Park Sdn Bhd, signed a sales and purchase agreement with Seriemas Development Sdn Bhd, a PNB subsidiary, to acquire the freehold industrial land in Kota Seri Langat, Selangor.

Area is also developing Selangor’s first gated and guarded, fully integrated and serviced industrial and logistics park named The Compass @ Kota Seri Langat, which has a gross development value (GDV) of RM1.75 bil.

This will be Area’s first freehold, premium industrial and logistics hub in Selangor with resort style features.

“We are ensuring a high level of customisation for our customers,” says Labrooy.

The project will be offering built-to-suit warehouses and manufacturing facilities with sizes ranging from 200,000 sq ft to 1 million sq ft with smaller detached factories of 12,000 sq ft to 75,000 sq ft.

This is to cater to the demand for medium-sized facilities in the Klang Valley, he says.

Describing the project as a “game changer,” he says The Compass will be leveraging on the upcoming West Coast Expressway as the property sits between Port Klang and West Port, KLIA and Shah Alam and provides ready access to the Klang Valley.

Among the features are a landscaped environment, professional park management, 24-hour security, clubhouse and sports facilities, purpose-built worker accommodation and custom-built logistics mega warehouses and factories.

Also built into the masterplan is a small and medium enterprise (SME) city to provide SMEs with a wide choice of competitively priced industrial units.

Area is not the only REIT that is expanding its industrial portfolio.

Axis Real Estate Investment Trust (REIT) recently announced that it is also expanding its industrial properties portfolio with a total estimated value of RM200 mil in acquisitions by year-end.

Axis REIT Managers Bhd CEO Leong Kit May says the REIT will continue to source and evaluate potential acquisitions that are deemed investable.

“The selection of properties will continue to focus on industrial properties, office and business parks with the potential for future enhancement.

“We are also open to grade A logistics and manufacturing facilities with long leases from tenants and strong covenants, as well as retail warehousing in locations that are ideal for last-mile distribution,” she says at its fourth-quarter (4Q) financial results briefing recently.

Axis REIT has 45 properties worth RM2.84 bil and its portfolio is largely made up of warehouse logistics at 44%, followed by manufacturing facilities (30%), office/industrial (17%), office (5%) and hypermarkets (4%).

Eleven of its properties still offer vacant outlets, while 34 others enjoy 100% occupancy as of Dec 31 last year.

“In 2018, the portfolio grew from 40 to 45 properties with the five newly-acquired ones being single-tenant industrial assets.

“The portfolio has increased by 1.26 million sq ft, taking space under management to 9.35 million sq ft and generating an additional RM2.9 mil in monthly rental revenue,” she notes.

Carving its niche

Axis REIT, like Area, is also constructing a few of its own properties.

“Having carved its niche in developing and managing industrial properties, Axis may continue to explore other built-to-suit projects, especially upon completion of the Aerospace Centre.

“One of the low hanging fruits could be the development of the Mega Distribution Centre Phase 2, which we expect to have a net lettable area (NLA) similar to that of Phase 1 that was successfully handed over to Nestle in early 2018.

“However, nothing is firmed up at this point,” says MIDF Research analyst Ng Bei Shan.

There is also the construction of its RM66 mil second development project, which appears on track to be handed over to its tenant, Upeca Aerotech Sdn Bhd, upon completion by 1QFY19, Ng says.

The original handover date was set for Dec 15 last year but due to the request for changes in specifications, the handover is now set for March 31. However, rental contribution from the Aerospace Centre had started in December last year.

For its 4Q18 financial performance, Axis REIT’s net property income (NPI) grew 50.3% to RM55.11 mil from RM36.67 mil last year on higher realised property income.

For the full year ended Dec 31, 2018, the REIT’s NPI rose by 25% to RM182.76 mil compared to RM146.2 mil the year before, while revenue grew 21.1% to RM204.36 mil from RM168.75 mil.

The projections of both Area and Axis for their industrial property developments look solid given that the preference for logistics warehouses will likely remain within the Klang Valley.

This is predominantly between Klang and Shah Alam, where there is a large concentration of manufacturing industries and a large population catchment. FocusM

This article first appeared in Focus Malaysia Issue 319.