Singapore Office REITs - DBS Research 2016-09-05: A prelude to a bottom

KEPPEL REIT K71U.SI CAPITALAND COMMERCIAL TRUST C61U.SI

Singapore Office REITs - A prelude to a bottom

Healthy interest for new office buildings with over 70% of Guoco Tower now pre-committed.
Award of white site at Central Boulevard another signal to potential bottoming of office values.
Top pick – Keppel REIT (KREIT; BUY; TP S$1.26).

According to The Business Times, Guoco Tower at Tanjong Pagar has now achieved pre-commitment levels of more than 70%, from only 10% in January this year. In addition, effective rents were reported to range between S$7.50 to over S$10 per square foot (psf) per month.
For Marina One, it was reported that Swiss private bank Julius Baer will be taking up 100,000 sqft of space at close to double digit-rents, relocating from its current premises at Asia Square Tower 1 where it occupies 72,000 sqft across two floors.
This new lease would take pre-commitment levels to c.35% from the 30% level announced in June. The healthy take-up and the ability to sign office rents above S$10 psf at Guoco Tower and Marina One indicate that the office market could potentially be bottoming out and allay fears over Grade A office rents crashing to S$7 psf per month from S$9.50 currently, and that new office supply will not be absorbed.

Thus far, Singapore office REITs appear to be relatively immune to poaching of their tenants for the upcoming new office supply, and should be able to hold fort against competition.
We believe this is a function of the proactive renewal strategy by various office REIT managers as well as the REITs typically owning newer or better specified buildings. These factors should counter tenants’ flight to quality and efficiency as they seek better quality space at comparable rents to their existing premises and/or more efficient floor plates to house more staff within the same amount of space.

We believe the upcoming land tender for a prime site at Central Boulevard in Marina Bay could act as another signal to mark the bottom of capital values in the office market especially if the implied gross development values (GDV) is close to recent office market transactions of c.S$2,700 psf. The white site allows for maximum gross floor area (GFA) of 141,000 sqm with at least 100,000 sqm for office use and has a minimum tender price of S$1.54bn or c.S$1,010 psf per plot ratio.
With no new office supply from 2018 onwards with the exception of this site, we believe the land auction will create significant pricing tension.

We believe that the current “flight to quality” for tenants to newer office buildings implies that downward pressure on office rents is easing and may be close to a bottom.
In addition, with office REITs trading at 11-29% discounts to the implied prices of recent Grade A office transactions, we believe the risk reward for office SREITs is favourable.
There is value to remain vested in the office REITs and our pick is KREIT (BUY, TP S$1.26) for its 23% discount to book value and reduced tenancy renewal risks near term with c.90% of leases not due until 2018 and beyond.
CapitaLand Commercial Trust (CCT; BUY, TP S$1.70) remains attractive for its steady growth profile on the back of the recent acquisition of the remaining 60% stake in CapitaGreen.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-09-05

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