REITs associated with logistics and data centers are worth revisiting

Every year has its defining moments. 2020, however, will be the defining year of the new decade. With global economies still reeling, a study released by Mckinsey & Co shows that virus affected sectors could take on average up to three years to recover to pre-COVID-19 levels. It presents opportunities for investors who are looking to rebalance their portfolios.

Singapore’s pioneer generations encourage investing in property, which is seen as a foundation that wealth is built on and a wise investment in the land-scarce island nation. However, as the landscape has changed slightly, some investors might find putting up millions of dollars in a property a stretch, especially at this time.

This is not to say one should ignore that market. Diversification is essential, and therefore, Real Estate Investment Trusts (REITs) can be considered one of the avenues an investor may use to include property in their portfolio. REITs pool money from investors to buy and manage a portfolio of real estate assets or properties. One of the key benefits to this is it gives an investor access to a broader range of industries with a decent liquidity level. Generally speaking, the types of REITs available are Commercial, Industrial, Retail, Residential, Hospitality, and Healthcare.

REITs Took A Hit This Year

According to the iEDGE S-REIT SGD Index (SG REIT Index), on a YTD basis, the index has fallen by about 6.96 per cent, with the most significant drop in the index being March 2020, just about the time that COVID19 raged like a wildfire. The index climbed steadily higher as the Phase 1 circuit breaker ended, and Singapore moved into Phase 2 in July. A Bloomberg report on Singapore’s performance listed REITs from July to October 2020 showed that the index’s top movers were in Healthcare, Data Center, and

Logistics. It doesn’t come as a surprise with the race to find the vaccine and with offices and retail businesses closing down. Working from home and remote working have also led to increased demand for proper cloud server infrastructures for companies globally.

Which REITs To The Future?

Although 2020 has been uncertain and turbulent for the markets, with most REITs paring previous gains, there remain two sectors that investors believe are positioned to benefit from this pandemic.

First is the logistics sector. Following the COVID-19 outbreak, appetite for logistics real estate among global investors has been

growing as it is believed that it will be among the first sectors to recover. This is attributed to the lockdown measures adopted by several countries that boosted online shopping and e-commerce. Hence, logistics properties, including warehouses, cold storage facilities, data centers, and logistics centers are well-positioned to benefit from this trend. Kantar consulting group says international e-commerce grew 41 percent in just three months, showing the massive accelerated growth and adoption of E-commerce due to the pandemic. Some of these REITs listed on SGX that investors could consider in this sector would be Mapletree Logistics Trust, Frasers Logistics & Industrial Trust, and EC World REIT.

Another relatively new sector that’s worth a look is data center properties. They form the backbone of the internet and are responsible for providing the infrastructure for cloud software and platforms that has become an integral part of modern businesses. An example of SGX is Keppel DC REIT. Before we examine further why we believe this REIT is worth considering, let’s take a brief look at the pandemic’s impact on data centers. Right now, we are seeing an increasing trend of companies relying on cloud servers to shift their businesses online. Looking ahead, the demand for the data center industry and network services will likely continue to see growth as more companies rely on them to support their shift to digital platforms.

Logistics REITs

We expect the logistics industry to continue growing, and as such, we’ve picked out three logistics-related REITs that may be worth focusing on: Maple Tree Logistics Trust (MLT), Fraser Logistics & Commercial Trust (FLCT), and EC World REIT (EC World). The former two are bigger, and EC World is a relatively new trust.

In terms of country allocation, MLT is more focused on Asia, with 29.3 per cent weight in Singapore and 29.8 per cent in HK; FLCT is more concentrated in Australia, Singapore, and Germany. Interestingly, EC World has a higher portfolio concentration in China, well-diversified among Yangtze River Delta, Hangzhou, and Wuhan. Therefore, we see them serving two very different needs. EC World is positioned for the ideal growth opportunity with China leading the recovery. MLT and FLCT stand for a more balanced income opportunity.

Let’s dive into some quick data for comparison. EC World has the highest return with a trailing annual yield of about eight per cent and the highest leverage risk with a debt/equity ratio at 98.12 per cent.

MLT has a trailing dividend yield of 4 per cent and a relatively safer debt/equity ratio at 71 per cent; FLCT in a similar range. This presents two opportunities – for a higher risk-taker, a well-diverse growth opportunity in China through EC World might be ideal with potential higher dividend returns and upside potential through the global recovery.

For medium- to low-risk takers, the well-established MLT and FLCT could be more appealing as it is more balanced in terms of geography and lower leverage risks. It must be noted that the price of these three have almost recovered from the impact of COVID-19, especially the former two. Waiting for a cyclical pullback in price could be a good strategy.

Data Centers

A newer, interesting REIT worth considering is Keppel Data Center REIT (KDCR), which has been riding the trend in Asia. KDCR is the first and currently lone pure-play data center REIT in Asia Pacific. It has 15 data centers across eight countries, including Singapore, under management. As it is one of its kind in Singapore, we will compare it with a normal industrial REIT of similar size and similar country allocation – Frasers Logistics & Commercial Trust (FLCT). Both are around 4.7-4.8 billion in market cap with properties widely allocated into the world with the main difference in selecting industries, with KDCR having a higher concentration in data centers than normal industrial REIT.

Diving into some quick data points, KDCR has a higher trailing annual dividend yield of 2.79 per cent with a marginally safer debt/equity ratio of 55 per cent. While FLCT does not come with a yearly trailing dividend yield of 2.55 per cent, and a slightly higher debt/equity ratio of 65 per cent. Although both REITs have relatively low dividend yield, KDCR has recently acquired its second German data center and has set foot into the Netherlands. Each of these acquisitions has pumped up KDCR prices from $2.00 in December 2019 to $2.43 in May 2020; it is currently sitting at $2.90 as of October 2020. With more acquisitions in the pipeline, the returns could present a quite rosy future. This trend could also be confirmed by quarterly revenue growth. KDCR has a very decent quarterly growth rate at 30.6 per cent while FLCT is behind with 12.8 per cent, indicating that KDCR has a high potential for future growth.