UOB Kay Hian's Jonathan Koh has trimmed his target price for Mapletree Logistics Trust from $1.45 to $1.41.
"We remain concerned about MLT’s exposure to China as a high vacancy rate of 21.5% continues to exert downward pressure on rents. Demand could further weaken if the US-China trade conflict resurfaces and intensifies," says Koh in his Jan 3 note.
On the bright side, weakness in China is offset by positive rental reversion in Singapore and Australia, adds Koh, who has kept his "hold" call.
No thanks to a downturn in the property market and tepid wage growth, consumer confidence and retail sales in China are still weighed down. Demand from domestic e-commerce and express delivery operators remains weak and large integrated e-commerce platforms are consolidating to their self-built warehouses.
"Rents are under pressure as landlords adjusted rents lower to attract tenants and shore up occupancies," he says.
Citing data from CBRE, Koh says rent for logistics space across China was down 3% q-o-q and down 6.4% year to date in 3Q 2024.
In 3Q 2024, vacancies in China are at a historical high of 21.5%. Only southern China is showing "pockets of strength" but for MLT, this is of limited impact as its assets in southern China, such as Guangdong, accounted for just 5% of its total floor space in its China portfolio.
Koh says that MLT suffered from negative rental reversions down 3.5% for its assets in Tier 1 cities and a bigger drop of 13% in the Tier 2 cities, leading to an overall drop of 12.2% in its 2QFY2025 ended Sept 2024.
Citing a likely escalation of the trade war with the US, demand for logistics space is likely to be affected. "Management expects the negative double-digit rental reversion to persist for another two quarters and moderate to negative single digit thereafter," says Koh.
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Here in Singapore, Koh expects rents to pause for a "breather" after a "stellar rise". Given a foreseen increase in supply, landlords are now focusing on maintaining occupancy and have "toned down" expectations of further rental hikes.
Again, citing CBRE, prime logistics rents in Singapore in 3Q 2024 were flat q-o-q but up 3.3% y-o-y. "Tenants are resisting further increase as rents have already risen 42.7% since the trough in 1Q 2020. Third-party logistics (3PL) and e-commerce players are in consolidation mode," says Koh.
MLT, says Koh, expects positive rental reversion to moderate to high single-digit in FY2026 ending March 2026, easing from the 12.5% gain in 2QFY2025.
Koh observes that MLT is now focused on acquiring modern high-specification logistics properties in growth markets, such as India, Malaysia and Vietnam, which benefit from supply chain repositioning, e-commerce growth and the limited supply of modern logistics properties.
To this end, it has in 1QFY2025 paid $227 million to acquire from its sponsor a modern Grade A logistics property in Malaysia's Shah Alam and one each in Ho Chi Minh City and Hanoi. MLT is also keen to expand in Japan, which is a matured market, due to the attractive yield spread, says Koh.
Given its relatively high leverage of 40.2% as of Sept 2024, MLT is funding the acquisitions by using proceeds from the divestment of properties with older specifications and limited redevelopment potential. The manager has identified some $1 billion worth of assets to be sold over the next three years, with those in Hong Kong and China accounting for half of this.
Meanwhile, MLT is bracing for cost of debt to edge up from 2.7% for 2QFY2025 to 3% as at the end of FY2026, as loans are refinanced and interest rate swaps are rolled over at higher interest rates in 2HFY2025 and FY2026.
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Koh, taking into account these factors, has trimmed his distribution per unit projections by 3% for FY2025 and FY2026.
His new target price of $1.41 is based on the dividend discount model with cost of equity at 7% and terminal growth at 1.5%.
Possible catalysts include accretive acquisitions to rejuvenate and reposition towards modern specifications logistics facilities, domestic consumption and e-commerce; positive contributions from redevelopment projects in Singapore and Malaysia.
MLT units changed hands at $1.31 as at 2.55 pm, up 1.55% thus far for the day.
