Exploring Industrial REITs: Is It Right For Your Retirement Portfolio

Being the 4th largest REIT market in the world, industrial REITs in Singapore are a key player in the market due to the growing demand for logistics, high-tech spaces, and data centres.

But is this sector the right fit for your retirement portfolio? This article delves into the various types of industrial REITs available on the Singapore Exchange (SGX) and the unique qualities and risks they offer.

Industrial REITs typically invest in various industrial properties, such as logistics and warehouses, business parks, general industrial spaces, light industrial and flatted factories, high-tech spaces, and data centres.

As each type of property carries its own distinct risk and reward profile, understanding them is crucial for making informed investment decisions.

Let’s take a closer look at the three main types of industrial REITs you will be able to find in Singapore.

1: Diversified Industrial REITs

Diversified industrial REITs invest in multiple types of industrial properties, spreading their investments across logistics, business parks, general and light industrial properties, and high-tech spaces.

These REITs don't focus on any particular type of property, allowing them to benefit from multiple industrial trends. By diversifying their portfolios, they aim to minimize risk and capture growth opportunities in various sectors.

Key Qualities:

Broad Exposure: These REITs offer investors access to a wide array of industrial sectors, balancing the risks associated with any particular industry.
Flexibility: Since they aren’t reliant on one type of industrial tenant, these REITs can adjust their portfolios as market trends shift easily.

We’ve seen this happen in Mapletree Industrial Trust as the REIT increased their exposure to Hi-Tech buildings and Data Centres from 24% in 2015 to 72% in 2024 while pivoting away from less desirable industrial properties like flatted factories.

Risks:

Diluted Focus: While diversification helps reduce risk, it can also lead to lower returns compared to a specialized REIT during industry-specific booms.

A clear example can be seen from the performance of Data Centre and Logistic Focused REITs which have outperformed the diversified REITs led by the artificial intelligence hype and the growth of the new economy.

The Diversified Industrial REITs in Singapore include:

AIMS APAC REIT
CapitaLand Ascendas REIT
CapitaLand India Trust
ESR Logos REIT
Mapletree Industrial Trust
Sabana Industrial REIT

2: Logistics-Focused REITs

Logistics REITs focus on properties like warehouses and distribution centres, catering primarily to tenants involved in third-party logistics (3PL) and e-commerce.

This type of REIT is well-positioned to benefit from the growing demand for faster delivery times and global supply chain optimization. With the rise of e-commerce, logistics-focused REITs have become a vital component of the new economy.

Key Qualities:

Strong E-commerce Demand: With the increasing demand for faster delivery and seamless supply chain management, logistics REITs are positioned to benefit from long-term growth in the e-commerce sector.
Tenant Stability: Many tenants sign medium- to long-term leases, offering a stable income stream. This can also be seen from the occupancy rate of the logistic REITs listed in Singapore where most of them are operating near 100% occupancy rate.

Risks:

Economic Cycles: The logistics sector is somewhat dependent on global trade and economic conditions, making it susceptible to downturns in consumer demand.
Political Risk: Logistics-focused REITs are more sensitive to geopolitical tensions, trade wars, and regulatory changes, which can disrupt global supply chains, reduce tenant demand, and impact rental income.

We’ve seen this pan out with the worsening relationship between the West and China which have resulted in a major shift in the global supply chain where companies prefer to structure their supply chain with a focus on service level instead of cost efficiency (a.k.a Friendshoring).

This has resulted in severe headwinds in the industrial and logistical properties in China which have caused a performance drag in the DPU of REITs with a high exposure to China industrial properties.
Technological Disruption: As technology in logistics evolves, tenants may need to upgrade their facilities, potentially leading to higher maintenance costs or the need for new investments by the REIT.

The Logistic Focused Industrial REITs in Singapore include:

Daiwa House Logistic Trust
Frasers Logistics & Commercial Trust
Mapletree Logistic Trust

3: Data Centre REITs

Data centre REITs are increasingly focused on providing high-tech spaces for technological firms and multinational corporations (MNCs) to house their servers and IT infrastructure.

These REITs are poised to benefit from the rapid growth in cloud computing, big data, and digital transformation across industries.

Key Qualities:

High Demand: The demand for data centres has surged due to increased digitalization and the rise of cloud-based services. Long-term contracts with tech firms can offer reliable income streams.
Technological Resilience: Data centre facilities are critical to the operations of major tech companies and MNCs, providing a robust source of rental income.

Risks:

High Capital Expenditure: Data centres that are operated on a fully fitted basis would require significant upfront investments in infrastructure, making them capital-intensive. They also face ongoing technological upgrades to stay competitive.
Tenant Concentration Risk: These REITs may be highly dependent on a few major tenants. If a large tenant leaves or renegotiates, it can have a significant impact on revenue.

We’ve seen this happen to Digital Core REIT back in 2023 when a major tenant that accounted for 22.4% of the REITs annual rental revenue filed for bankruptcy. As a result of this uncertainty, the share price of Digital Core REIT saw a 30% drawdown as investors rushed for the exit.

The Data Centre REITs in Singapore include:

Digital Core REIT
Keppel DC REIT

Conclusion

Industrial REITs can be a solid addition to a retirement portfolio due to their potential for stable income and growth. However, like all investments, they come with risks.

Diversified industrial REITs offer broader exposure to the industrial market, balancing risk across various property types but may not perform as well as other focused REITs depending on the market trends.
Logistics-focused REITs can capitalize on the booming e-commerce sector but are vulnerable to global trade fluctuations.
Data centre REITs may provide robust income from technological tenants but face high tenant concentration risk.

Before diving into industrial REITs, consider your risk tolerance and financial goals.

If you seek stable, long-term income with moderate growth potential, diversified industrial or logistics REITs might be a good fit. For those with a higher risk appetite and a focus on technological trends, data centre REITs could offer exciting opportunities.

As with any investment, due diligence is crucial. Understanding the unique qualities and risks of each REIT type will help you make a more informed decision about whether industrial REITs belong in your retirement portfolio.

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