Axis-REIT has completed four property acquisitions this year and is still on an active hunt for more to expand its portfolio.
Having said so, Axis-REIT chief executive officer Leong Kit May says the acquisition plans are not “just buying for the sake of buying”, because only good assets that could add value to the group’s portfolio will be considered.
Riding on warehouse logistics boom
Amid the challenging environment, EdgeProp.my finds out what we can expect from Axis-REIT in the days to come in an exclusive interview with Leong (following excerpt edited for clarity).
Industries that are still performing well
EdgeProp: The group’s 2Q2021 results saw a 9.27% growth in net property income against the same period last year. Tell us more.
Leong: We are okay, we’re doing quite manageable. In a way, I think we are lucky that the industries our tenants are in are doing okay as most of them are in essential services, so they are operational. So, because of that, we are also there to provide our services to them to ensure there is no disruption in the using of space.
Certain industries are doing very well, especially in the e-commerce segment because the requirement for space is much more now. In the last 18 months since the start of the pandemic, everybody is buying online. The J&T and Lazada Express deliverers are dropping by every day, because everybody’s buying online, and that drives the demand for warehousing. Not only that, but because of all these disruptions we are seeing, people are actually storing more nowadays. That, again, drives the demand for warehouses.
We’ve been very busy the last 18 months, we’ll say, because the portfolio has grown. Last year we completed [acquisitions on] five properties and this year we completed four more. So, we have 57 properties in our portfolio now with [a total of] 11 million sq ft of space.
The focus has been very much on managing the portfolio, and improving the occupancy rate. We are lucky. The occupancy rate actually improved from 91% in 1Q2021 to 94% in 2Q2021, when two new tenants came in.
EdgeProp: Is the 94% in occupancy rate an average across the portfolio or skewed to a specific property type in your portfolio?
Leong: That would be average across all our properties. We have a few types of properties in our portfolio, but of course the bulk is the industrial properties. These properties are used for both warehousing and manufacturing.
Our industrial properties used for warehousing and manufacturing are at 100% occupancy. We also have some business parks in our portfolio. For business parks with some office and warehousing elements, the occupancy rate is about 70%.
We also have two hypermarkets with very long leases occupied at 100%. We have a few offices in our portfolio which are close to 80% occupied. So when you put everything into an equation, the average is about 94% although our portfolio is still skewed towards warehousing and manufacturing industrial properties.
In the last five years during normal times, the occupancy rate of our properties hovers around 94-95%. We even went to the high of 97-98% previously. Last year we were at around 91% because two tenants moved out, so it was just the transition while we were waiting for the new tenants to fill up the space. So, there was a little bit of gap there and then we went back to 94%.
Keeping up to the mark during the pandemic
EdgeProp: How is the team adapting to the new normal?
Leong: We are constantly adapting to the new normal. This working from home is not easy – you are really working the whole day when you’re working from home. The hours are actually much, much longer than sitting in office. You don’t even get traveling time from one place to another, where you can have a little bit of break in between.
We are leveraging technology a lot such as being on virtual meetings. We continue to engage with the market, our tenants, our stakeholders and business partners consistently. Of course, this is done very differently. Instead of face-to-face, now it’s all virtual. Some of the site visits and marketing of spaces, we are doing them virtually so that we can still reach out to potential tenants amidst the travelling restrictions.
We also carried out some road shows with some agents a few weeks ago. For some of us who are working from home, we also have to keep in touch with the rest of the colleagues. And in terms of information flow, it has to be really communicated closely with each other, to ensure that the level of service that we’re giving to tenants is top notch.
EdgeProp: What is your biggest takeaway from this pandemic?
Leong: It is very challenging times and at the end of the day, you have to stay focused on what you do best. The team really have to be on the ground at this time and human resource capital is very important. Continuous engagement with our stakeholders and business partners must be of top priority.
EdgeProp: What would be one positive impact the pandemic has on Axis-REIT?
Leong: The positive impact is that the demand for warehousing space has increased. To be honest, we have gotten so many enquiries but our space is almost 100% occupied. I mean, in a way, we are very blessed because the demand for these sectors (warehousing and logistics) is booming.
Upping the occupancy rate
EdgeProp: Do you foresee downward pressure on rates in the upcoming renewal of leases?
Leong: For industrial property tenants, their leases tend to be longer. The manufacturers typically need long leases to ensure they are able to continue operating on the sites. So, typically, for industrial properties, our weighted average for leases for the portfolio is above five years.
Some of the tenants have contractual rental rates that are locked in. So when the time comes, we go back to what has been agreed on the contracts. In terms of renewal, it depends on the current market rate and the demand and supply of the properties at that time.
Last year, we have done about more than 5% positive rental reversions for rental renewals. Of course, with the five-year weighted average lease, we have about 20% of space coming up, some for renewal, etc. In 2020, over 80% of our tenants renewed and we have some tenants coming in as well. For year 2021, out of the total space that is coming up for renewal, we have already renewed 80% of it in the first half of 2021.
EdgeProp: You only have about 5% of exposure for office spaces. Are you looking at divesting your portfolio of this segment?
Leong: We would like to maintain our exposure for offices because if you look at our portfolio of properties in terms of location and type, we are at the Klang Valley, Penang and Johor, and we also have a big basket to choose from.
We also want to be able to provide a one stop solution to our tenants when they come to us. This means that we do not restrict ourselves to introducing only one type of property to our potential tenants. We take the time to sit down and listen to what their requirements are, so we can tailor the best space solutions to them.
Nevertheless, we believe that offices are here to stay. One of our office properties, Quattro West, which is located at Persiaran Barat, Seksyen 52 [Petaling Jaya (PJ), Selangor] was 40-60% occupied before the pandemic hit. After we had repositioned the assets, the occupancy rate went up to 100% in 2H2020.
Some of the offices [whose HQs were in KL] were looking into their business continuity plans and they needed to set up separate offices in PJ, so we took the opportunity to fulfil that demand.
We are quite pleased with that because we did not stop marketing and engaging with potential tenants. In terms of product offerings, we have also continued to look at what is really required in the market now.
EdgeProp: Did the higher occupancy rate come with higher management costs as well?
Leong: The rental rate [to the tenant is very much] what the market is demanding. Initially, everyone was still quite sceptical because of the need to comply with the standard operating procedures for offices during this pandemic, which would result in higher costs.
Yes, the sanitisation cost is the biggest followed by the need to put in the thermal scanners in the offices, but that is a one-off cost. The cost has slightly increased but it is not too much of an impact for us.
EdgeProp: With Covid-19 literally in the air right now, much awareness has been raised on indoor air quality (IAQ) and the ventilation in buildings. As a building owner and property manager, what does this mean for you?
Leong: Previously it was about washing your hands frequently and double-masking, etc, but now we need to look at the IAQ as well. Our facilities team are now looking at sanitising the air-conditioners too. It is our utmost priority and we are looking very seriously into this because safety of everyone in the building is number one.
People are getting very worried, and especially after a while working from home, when they come back to the office, they [the owners] need to ensure the office is ready and they [the users] feel safe. Tenants are getting smarter nowadays and question the air quality, ventilation, etc – they are definitely asking.
Making good headway
EdgeProp: Does Axis-REIT have any more plans to acquire more properties for the rest of the year?
Leong: Yes, we will continue to focus on industrial properties and increasing our portfolio with such properties including warehouses, manufacturing facilities and hypermarkets, which is ideal for last mile distribution use as well. We are also looking for properties that have future enhancement potential.
EdgeProp: What is your outlook on the property market and for the industrial sector as well?
Leong: The road to recovery is still very unclear at this juncture, especially with the present daily infection rate. However, we are pleased that the ongoing immunisation programme is progressing very well together with the National Recovery Plan to ensure the various businesses will start to open in stages. The effects of this will snowball and boost the overall domestic economy, benefitting the REIT sector and the whole economy overall.
We believe the industrial properties will continue to perform well especially for those in the logistics and warehousing business. This mainly stems from the e-commerce segment, and we know that the e-commerce retail segment has been doing well in the last 18 months where consumers are shifting their spending behaviour to online shopping. So that will push up the requirements and demands for warehousing space centres.
On that note, due to the disruptions to the global supply chain because of the pandemic, we have also seen businesses increasing their storage spaces, because they are trying to minimise the disruptions in their supply chain and they have also started to stock up more.
Leong: Yes, we will continue to offer the market this expertise of ours. We have been in the business for so long, and we know what the market requires and what the tenants and operators require. This will continue to be an area where we’ll be actively focusing on.
EdgeProp: Above and beyond knowing your customers’ needs and the nature of the property as well as the locality of the property, how do you stand out from your competitors?
Leong: For us, when a tenant comes to us, they are our business partners. When they expand their businesses later on, we want to be the space provider for their expansion as well.
So, I think for us as landlord, it is not just about giving them the key and that’s it. It is always a relationship we maintain over time, to see to their needs and make sure they are happy at the sites. The relationship that you build over the years is very important, and the duration which the tenant stays – that speaks about whether a landlord is good or not.
For industrial properties, the offerings we have are very wide and very different. When it comes to requirements for warehousing alone, it is very diverse. There are industrial properties for bulk storage, some require to be near to the port, some are last mile delivery centres which just want to get their goods and be out as fast as possible without any time wasted.
So, the efficiencies in terms of the layouts of the properties are all very different, depending on the users’ needs. There is never a one-size-fits-all, but with an extensive experience in dealing with over 50 tenants, we know and we understand the industries these tenants are in. We know their requirements, and we are able to actually cater to their needs better. We have the insights into the different challenges faced by different industries.
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