Singapore Property - Maybank Kim Eng 2016-09-08: Office REITs could react ahead of a bottom to rents

Singapore Property - Maybank Kim Eng 2016-09-08: Office REITs could react ahead of a bottom to rents Singapore REIT Singapore Property

Singapore Property - Office REITs could react ahead of a bottom to rents

Turn positive on office REITs; CCT top pick. Further rerating for developers unlikely. 

  • Office rents may continue to slide amidst strong completions in the near term. However, we believe the issue is well-flagged and the market could instead focus on a bottom. REIT prices could react ahead.
  • Furthermore, persistently low interest rates and narrow cap rates in office transactions could drive a further tightening of REIT yields. A potentially bullish bid for the Central Boulevard site could also send a positive signal for office assets. 
  • We recalibrate FY16-18E DPUs by +1.5%/- 1.8%/-4.6% and tighten target yields by 50-100bps. This raises TPs for our office REITs by 7-19%. 
  • CCT (top pick) and KREIT have been upgraded to BUYs from HOLDs. Suntec REIT remains a HOLD due to its high office lease expiries and retail headwinds. 
  • Property developers should continue to reel from thin margins and development risks from elevated land prices. 
  • With a persistently weak macro outlook, we prefer stable REIT platforms over riskier developers.

Large office supply well-flagged; Focus on a bottom. 

  • The large supply of office space due for completion next year is well flagged by the market. While rents could continue to fall, we think the market could instead focus on a bottom for the sector. We expect rents to bottom over the next 5-6 quarters and REIT prices could react ahead.
  • For KREIT and CCT, risks to DPUs should be attenuated by their relatively low lease expiry near term. Persistently low interest rates should also be supportive of REIT prices. Lastly, we think the 3.75%-4.25% cap rates assumed by REIT valuers appear conservative against the low cap rates of around 3% in recent office transactions. Therefore, we think office REIT prices could trade closer to book and yields may tighten further in the global yield hunt.

Central Boulevard could send positive office signal. 

  • Fierce competition for the Central Boulevard land tender in the Marina Bay precinct could send a positive signal for office assets as over 70% of the site will be used for offices. Good prices in recent transactions of nearby properties could encourage strong bids. 
  • As the minimum committed price is already in line with recent land deals, we think the final price could be higher.

Slender margins for property developers 

  • Generally elevated land prices could weigh on PBT margins for property developers, in our view. While low interest rates could make financing cheaper, the low cost of capital has also encouraged competition for land. Our analysis suggests that PBT margins have weakened to just 13% for residential plots sold this year. 
  • Limited sites from the government’s land sales programme could continue to keep land prices high. Yet, developers will need to replenish landbanks to sustain their businesses.
  • With cooling measures likely to stay for an extended period of time, we doubt that sales volume will jump markedly in the near term to compensate. 
  • No change to our forecasts or stock ratings.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-08
Maybank Kim Eng SGX Stock Analyst Report