The first Singapore-listed REIT, Frasers Logistics & Industrial Trust (FLT; SGX: BUOU) to start with a pure-play Australian industrial portfolio looks promising, according to DBS Research’s recent research report covering some of the REIT’s investment merits.
DBS Research analysts base their predictions on FLT’s latest heads-up of a potential acquisition of seven Australian properties from their sponsor, Fraser Property Australia (FPA). The properties are located in the prominent cities, Melbourne, Sydney and Brisbane.
If the acquisition were to go through, it would set FPA back by a total of A$179.5 million (inclusive of fees and payable stamp duties). DBS Research sees this as a good buy, citing the target asset portfolio’s strong operational metrics, a weighted average lease expiry (WALE) of almost a decade and the assets’ median age of only two and a half years.
The portfolio’s initial yield of 6.4 percent is lower than the current 6.9 percent portfolio cap rate but is still reasonable based on the attributes mentioned above.
Nevertheless, DBS Research pointed out that if the proposed acquisition were to pass, FLT’s portfolio would grow by 9.7 percent to about A$1.9 billion. FLT’s manager, when asked about FPA’s plans of funding the acquisition, he explained that either borrowing or a combination or loans and equity is expected.
Overall, this expansion is looked upon as positive by DBS Research analysts. They reiterated their “BUY” call and mentioned their “estimates have not factored in the acquisitions”. The success of the deal depends on shareholders’ approval at FLT’s Extraordinary General Meeting (EGM), which will be announced at a later date.
Key risk: Australian property market getting very inflated
On a side note, the CEO of Australia & New Zealand Banking Group (ANZ) warned of risks in Australia’s property marketing being “very inflated”, particularly housing prices. He went on to soften his tone during an interview with Bloomberg Television by saying a market crash is still “very low”.
A point to note, though, is that Sydney’s property prices have surged 75 percent over the past half a decade, just trailing behind Hong Kong and beating Singapore to be the most expensive housing market.
Still, Shanghai United Real Estate, a Chinese property developer has plans to invest more than A$1 billion in Australia’s real estate market over the next decade. That is on top of the A$600 million already invested in several residential and commercial developments.
The $1 billion estimate was considered as “conservation” by Shanghai United’s CEO. It seems like the Chinese property developer doesn’t care what economists are concerned about – Shanghai United is not alone.
More room to grow
With long-term plans by these Chinese developers, it seems apparent why DBS Research could be optimistic about FLT’s bottom line in the medium to long-term. The Australian property prices might be “elevated” as ANZ’s CEO mentioned.
But with the deep pockets of Chinese property developers propping prices up, specifically in the Australian real estate market, even Wall Street is interested. FLT seems to be in a good position to benefit.
DBS Research: Frasers Logistics & Industrial Trust (SGX: BUOU) – BUY; Target Price: $1.10