Industrial property and the brave new world of e-commerce
Industrial property offers lower oversupply risk as build time is far quicker and sensitive to real time shifts in supply and demand.
Dubai - Investing in apartment/suburban malls/office Reits and villas now senseless as these sectors simply lack pricing power
By Matein Khalid Global Investing
Published: Sun 28 Jan 2018, 6:19 PM
Last updated: Sun 28 Jan 2018, 8:21 PM
The rise in treasury bond yields is unquestionably bearish for classic bond proxies such as utilities and most segments of real estate. Yet I have made no secret of my conviction that industrial real estate is the most attractive, most resilient niche in global property investing. This does not mean an investors should shell out a fortune to own a warehouse or buy a leveraged lease on an Amazon bulk warehouse with the fixed seven to eight per cent returns while bearing the full risk of an industrial cycle downturn or interest rate hike. My interest lies in the industrial real estate investment trusts (Reits) in the US, Europe and Singapore, which are listed on a major stock exchange, boast organic growth, seven- to 10-year tenant lease, corporate tenants with world-class brands, pricing power and, ideally, be positioned at the nodal points of the world's evolving e-commerce infrastructure.
Investing in apartment/suburban malls/office Reits and villas is now senseless as these sectors simply lack pricing power. I am aghast at the low dividend yields, conflicts of interests (wives getting refurbishment contracts in a husband's Reit, c'est triste!) exploitative fees and total lack of liquidity in so many certain Reits. I cannot think of a single liquid industrial Reit to invest in the GCC. This will change as the plunge in Grade A warehouse rents will force operators/owners to rethink exit strategies.
My investment experience in industrial Reit investing was facilitated in 2006 by Dr Finian Tan, former Cambridge mathematician/Goldman Singapore CEO and chairman of Vickers Financial Group, a Singaporean mini-Blackstone. I spent a week with Dr Tan in his Suntec Tower office and his lovely Holland Road classical mansion, learning the nuances of industrial property investing in Asia. This led to a windfall deal where I helped Finian arrange financing for the IPO of Cambridge Industrial Trust on the Singapore Exchange in 2006, taking advantage of Mitsui's decision to exit owning warehouses in Southeast Asia. The deal was highly profitable as the yield was 8.50 per cent, the NAV doubled in the next decade and the Singapore dollar fell from 1.65 in 2006 to 1.31 now.
I remember that way back in 2006, Dr Finian predicted that his good friend Jack Ma's Alibaba would change the world. I wish I had gone to China with him when he invited me but I feared the continually expanding frontiers of my own ignorance about the Middle Kingdom. After all, the only Chinese words I use in daily life are chop suey and dim sum, LOL! In life, as in the markets, the ultimate risk is when you don't even know what you don't know.
I had profiled San Francisco-based Prologis Reit as my favourite global logistics real estate equity as its portfolio encompasses the US, Europe, Asia and Latin America. Prologis has earnings growth embedded in its business model until at least 2023, something impossible to find in any Reit I know listed in the Middle East. With more than 800 million sqft of industrial real estate in dozens of countries on four continents, Prologis defines its property segment. Prologis generated a total return of 28 per cent for investors who acted on my recommendation in Khaleej Times in 2016 to early-2017. With its own land bank, its established relationships with the Fortune 500 multinationals, its development prowess, Prologis sees funds from operations in the 2.85-2.95 range in 2018. This means Prologis can offer a total return of 15 per cent in 2018 if investors time their entry price right.
I expect industrial real estate to have the lowest vacancy costs and highest total return after data centers/medical labs in the next two years. Vacancy costs in high-service cost/maintenance/insurance/mortgage markets make home ownership extremely risky. Re-leasing costs are also much lower than in office, homes or, God forbid, retail. Above all, industrial property offers lower oversupply risk as build time is far quicker and sensitive to real time shifts in supply and demand. Thanks to the exponential growth of E-commerce, industrial real estate offers high liquidity as pension/sovereign wealth funds scramble to own this asset class. Even so, I can find industrial assets priced below replacement costs even in 2018. In Singapore, I am long-time fan of both Cambridge and Mapletree Logistics, the ultimate hard asset in the hardmoney Asian Swissie! Industrial real estate is also a hedge against inflation, offers positive leverage as well as uncorrelated returns with equities. This property segment is pure gold if done right.