The rapidly deterioration in the external sector and the economic outlook is likely to crimp demand for industrial/ warehouse space amid growing new supply. Softening yields (+150bp from June 2008) should weigh on asset values.

Rental reversions/lease structures are likely to underpin REIT cashflows. That said, growing concerns over their ability to refinance debt have seen REITs trade below book. In such conditions, investors need to focus on underlying asset value/quality, while REITs with well-located assets should benefit from potential M&A activity.

Given the slowdown in the economy, supply in the industrial sector (according to the Urban Redevelopment Authority [URA]) remains broadly fixed for factories, although deferrals have emerged in the warehouse/logistics sector. While the outlook for vacancy remains broadly the same — we expect vacancy to broach 10% in the factory and warehouse sectors over the course of the next two years — the outlook for demand has weakened significantly. Quarterly data from the URA highlights that 4Q demand has nearly halved over demand achieved in 3Q08. Given the deterioration in the economy and the weaker outlook for demand (notwithstanding a marginally better vacancy prognosis for the warehouse sector given supply deferral) we have adjusted our peak-to-trough decline in industrial rents to 31.7% versus 23.9% previously. We now expect average industrial rents to slip back to S$1.33/psf per month.