Explain what drives income in industrial and data centre REITs.
Judge an industrial or data centre S-REIT on three points that count for less with a mall REIT: the mix of industrial property it holds, the number of years left on the land under it, and, for data centres, power, technology and how much of the income rests on a few tenants. Rent here comes from warehouses, factories, business parks and server buildings, and the way that rent is earned is very different from a mall's.
Drive the expressways in the west of Singapore and you pass warehouses, factories, business parks and data centres. The data centres are the large, windowless, air-conditioned blocks. Many of these buildings belong to S-REITs, though investors pay industrial and data centre REITs less attention than they give mall REITs.
Darren owned no industrial or data centre REITs. To learn how they work, Darren picked one industrial REIT and one data centre REIT to study. The industrial REIT's report gave an average remaining land lease, a question Darren had never thought to ask. The data centre REIT drew a large share of its income from a handful of tenants.
The word "industrial" covers several segments, and each one behaves differently.
Logistics properties are warehouses and distribution centres. Demand for this space comes from trade, from e-commerce and from firms keeping more stock near their customers. The usual tenants are logistics companies, retailers and manufacturers.
Business parks are landscaped, campus-like developments that URA plans for high-technology, research and development, and other knowledge-intensive businesses, and they are usually priced below city-centre office space. Technology, research and back-office teams rent them, so demand for business parks follows office demand in part.
Factories run from basic manufacturing floors up to high-specification buildings for firms in electronics, pharmaceuticals and precision engineering. The higher grade of space often comes with stronger floors, more power and cleaner air. A tenant that has paid heavily to fit out a building like this is less likely to move.
Logistics, business parks and factories each have their own tenant base, supply pipeline and rent cycle. If a REIT reports industrial income as a single figure, it may be blending all three. Look for the segment breakdown in the annual report.
Most industrial land in Singapore is leasehold. Freehold industrial property exists, but it is rare. A large share of industrial land is leased from JTC, the government agency that develops and manages industrial estates. Each JTC lease has a fixed term. At the end of the term the land and building return to the lessor unless the lease is renewed, and renewal is never automatic.
This makes industrial property a wasting asset, which a freehold building is not. Compare two factories that are the same in every way except their land leases: one has forty years left and the other fifteen. The factory with forty years left is worth more, since it can collect rent for longer. Each year that passes shortens the remaining lease, and with everything else unchanged, value tends to fall.
If you hold an industrial REIT, watch two lease figures. One is the average remaining land lease for the whole portfolio, the figure Darren found in the industrial REIT's report. Most industrial REITs publish it, usually weighted either by value or by income, and you should note which weighting the report uses. The other is how lease expiries are spread across the properties. Where several properties are close to the end of their leases, their values are likely to fall, and the REIT has to choose for each one whether to renew, redevelop or sell. JTC sets the renewal terms. Check its current policies and don't assume any lease will be extended.
A data centre holds computer servers for companies that need computing power and storage. Tenants can be large technology companies, banks or small firms renting a few racks. Leases tend to be long, and tenants are sticky because moving servers is expensive and risky. This gives the REIT stable income and a long WALE, a measure explained in Lesson 5.3, "WALE, occupancy and rental reversions".
There are three risks to watch. The first is power. Data centres use large amounts of electricity, so a site's value depends on its power supply and on what that power costs. In some markets, rules on new data centre capacity can also limit growth. The second is technology. As servers get denser they need more power and cooling, and an older data centre can become less useful unless it is upgraded. The third is concentration. A data centre REIT may earn a large share of its income from a few very large tenants, so losing one of them has a big effect. Darren's data centre REIT, with much of its income from a handful of tenants, carries this risk.
The way the lease is set up also changes the risk. In one setup, a single tenant leases the whole building and runs it, paying rent much as it would under a long industrial lease, and the REIT mostly just owns the building. In the other, the REIT or an operator supplies space, power and cooling to many tenants, each renting part of the capacity. Income can be higher this way, but the landlord carries more of the costs and operating risks. Annual reports usually describe the lease structure for each data centre separately.
When you read the report, find these:
the split of industrial income between logistics, business parks and factories the portfolio's average remaining land lease, and whether it is weighted by value or by income how many properties are close to the end of their land lease JTC's current renewal policies for data centres, how much income comes from the largest tenants for each data centre, whether the tenant leases the whole building, takes a shell and does its own fit-out, or rents fitted space with power included who pays the power bill
In the activity you will record three numbers for one industrial or data centre S-REIT. Those three numbers cover most of what sets its income apart from a mall's.
Pick one industrial or data centre S-REIT and write down its average remaining land lease, its top tenant share and its WALE.
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