Skip to main content Skip to footer

Asia Pacific Industrial Assets Should Still Have a Seat in Investors' Portfolios

blog CMIS apac industrial assets to have a seat in investors portfolios 3x2 v4

Rising price premiums and falling yields of industrial REITs suggest that direct industrial real estate assets are likely to outperform the listed markets over the medium term.


The relative performance of Asia Pacific’s (APAC) industrial and retail sectors has come into focus over the past few years, as investors deliberate on their investment strategies.

For these investors, listed REITs provide a compelling alternative performance benchmark to the direct market indices, offer a high degree of liquidity, and exhibit pricing metrics based on sentiment and forward-looking expectations.

 

“Prices of industrial REITs have climbed 77%, whereas in a stark contrast, retail REITs have posted negative returns over the same period.”

 

APAC Industrial REITs an investment darling in the recent years


Over the past three years, there has been a significant divergence between the performance of APAC industrial and retail REITs. Across the region, prices of industrial REITs have climbed 77%, whereas in a stark contrast, retail REITs have posted negative returns over the same period.

In terms of valuations, on a weighted market capitalisation basis, APAC industrial REITs are now trading at a 35% premium to underlying valuations, while APAC retail REITs are trading at a 10% discount.

Asia Pacific Retail vs Industrial REIT performance
 

“In terms of valuations, industrial REITs are now trading at a 35% premium to underlying valuations, while retail REITs are trading at a 10% discount.”

 

This implies that investors appear to be happy paying market premiums to gain investment exposure to the APAC industrial real estate sector, while even ‘on sale’, the APAC retail REITs struggle to find takers.

 

Tighter yields could signify higher expected rental growth to come


One of the key metrics that help to tell the relative story around the performance of industrial or retail REITs is the implied yield1.

Implied yields show operating income of a REIT (i.e., EBITDA) relative to the enterprise value of a REIT - that is, the value given to the portfolio on the listed level (i.e., market capitalisation plus debt, minus cash).

Historically, both implied yields and market yields in the region’s industrial sector were at a premium to those in the retail sector. However, implied yields of APAC industrial REITs have gone on a one-way downward path over the past five years and are now below 4% for the first time on record, compared to 6% back in 2017.

In contrast, APAC retail REITs have an implied yield of over 5%, which is generally in line with their five-year average.

Asia Pacific Implied Yields (Industrial vs Retail)

Direct market yields in the APAC industrial sector have also compressed by more than those in the other asset classes over the same timeframe. However, the premium seen in the industrial REITs has exacerbated this trend, when looking at the implied yields.

This suggests that the market is either expecting a continued market-level cap rate compression, an outperformance of rental growth – or a combination of both – when it comes to industrial real estate assets.

 

Investor interest in APAC industrial real estate assets still has legs


Some market observers have noted that the pricing of industrial land and completed assets are starting to look on the expensive side. Others have expressed their reservations about the potential for continued outperformance despite the generally accepted growth in underlying demand from the occupier side.

 

“… It could well be easier for industrial REITs to acquire assets on a yield-accretive basis, which will also raise the prospect of more secondary capital-raising and more IPOs of industrial portfolios.”

 

Certainly, the significant premiums applied to the listed markets would suggest that direct industrial real estate assets have the potential to outperform listed industrial REITs over the medium term. However, with such high listed price premiums, it could well be easier for industrial REITs to acquire assets on a yield-accretive basis, which will also raise the prospect of more secondary capital-raising and more Initial Public Offerings (IPOs) of industrial portfolios.

All these suggest that there is still a strong and sustained investor interest in APAC industrial real estate assets, and investors should still make room for these assets in their investment portfolios.

For more insights and a detailed discussion on pricing and investment opportunities in the industrial real estate sector, talk to a Colliers Capital Markets expert today.

 

1 Implied Yield is the inverse of Enterprise Value/EBITDA

 

Liked what you read? You may also be interested in:

 

---

Article enquiries

Contact us here.