Industrial REITs poised to benefit from data centre spin-offs and acquisitions — MBSB

KUALA LUMPUR (June 24): The spin-off of data centre assets into real estate investment trusts (REITs) and acquisitions by existing players could significantly increase their exposure to the sector over the next few years, said MBSB Research.

In a report on Wednesday, MBSB noted that REITs could benefit from incorporating data centres, maintaining its 'positive' rating on the sector.

In particular, industrial REITs remain the most likely acquirers of data centre assets given their operational expertise, portfolio synergies, and the superior rental growth prospects offered by data centres, said the house.

As such, it highlighted Axis REIT (KL:AXREIT)('buy', target price/TP: RM2.17), AME REIT (KL:AMEREIT)(non-rated) and Atrium REIT (KL:ATRIUM)(non-rated) as most likely acquirers of data centre assets.

Other potential acquirers include diversified REITs with industrial assets such as Sunway REIT (KL:SUNREIT)('neutral', TP: RM2.39), CLMT (KL:CLMT)(non-rated) and Al-Salam REIT (KL:ALSREIT)(non-rated).

One key benefit of including data centres in a REIT is reliable rental income from long leases.

This is due to the centres’ long lease structure driven by high switching costs faced by tenants and thus high occupancy rates.

“Such characteristics align well with REIT investors’ preference for stable and sustainable income streams,” MBSB said.

Further, data centre REITs benefit from offering a proxy to digital economy growth worldwide, as data centres provide the underlying infrastructure that supports digital activities.

“Data centre REITs tend to be more resilient than office and retail REITs, as demand is driven by structural growth in digital infrastructure rather than economic cycles,” it added.

However, it warned of challenges including high concentration risk, in which loss of a major tenant can have significant earnings impact as many data centres are single-tenant or leased to a small number of hyperscalers.

Moreover, revenue is concentrated far more than in multi-tenant retail or industrial REITs.

MBSB also cautioned “higher maintenance and expansion capex” due to continuous investment in infrastructure and upgrades.

Nonetheless, a data centre REIT can potentially command a valuation premium over a conventional industrial REIT, enabling asset owners to unlock greater value and achieve higher returns on their investment, the house said.

It cited Singapore’s pure-play data centre REIT commanding a lower dividend yield due to stronger rental growth potential, thus indicating that investors are willing to pay a premium for their stronger growth prospects and perceived stability.

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