A rapid deterioration in the external sector and the economic outlook is likely to crimp demand for industrial/warehouse space amid rising new supply. We expect yields to soften by 150bp from June 2008, placing downward pressure on capital 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.

Amid a marked contraction in both GDP (4Q08: -4.2%) and GDP expectations for FY09F (Nomura economist changed expectations from -4.9% in January to latest -6.3%), we expect the contraction in real demand (manufacturing job losses in 4Q08 were 6,200, the first decline in manufacturing employment since June 2003) for industrial space to accelerate, with the contraction in demand likely to be manifested in worse-than-expected rental declines in 1H09F. We now look for rents to decline 31.7% over the cycle versus our previous forecast of 23.9% (see below: weaker outlook for demand), and maintain our view that rising risk premiums and lower growth expectations will be reflected in a 150bp increase in industrial yields.

Consequently, we cut our GAV estimate for Cambridge Industrial Trust’s (CREIT) portfolio, from S$592.1mn, to S$571.1mn (-3.5%). This represents a potential asset write-down of S$396.6mn (or c. 41%) from the end-4Q08 portfolio value of S$967.7mn. As a recap, we have consistently value CREIT’s portfolio based on the projected achievable market rents upon the expiry of current leases, taking into account the shorter 30-year leasehold period for 39 out of the 43 properties currently held.