Keppel REIT - RHB Invest 2016-10-19: Rental Pressure To Persist

Keppel REIT - RHB Invest 2016-10-19: Rental Pressure To Persist KEPPEL REIT K71U.SI

Keppel REIT - Rental Pressure To Persist

  • While Keppel REIT’s portfolio rent reversions are still positive (9M16: +3%), we expect upcoming lease renewals to face headwinds due to weak new demand and supply headwinds. 
  • Overall, we expect Grade-A office rentals to fall by another 5-10% over the next year as the market digests huge incoming supply. 
  • Keppel REITs share price has by +22% YTD, with positive factors of high portfolio occupancies and relatively low lease expiry rates over the next two years. 
  • 3Q16 results were in line. Maintain NEUTRAL, with a TP of SGD0.99 (11% downside).

Rental pressure to persist. 

  • In 3Q16, Keppel REIT renewed 39 leases of 635,000 sq ft of office space, at an estimated rental reversion of +4.4% (9M16:1.5m sqft, +3% rent reversion).
  • After this, it has no leases due for renewal in 2016. About 5.2%/5.4% (as a percentage of NLA) leases are scheduled be renewed in 2017 and 2018 respectively. We expect rental pressure to persist for upcoming Singapore office leases, with weak new demand and a huge supply of nearly 3m sq ft of competing Grade-A office space coming on-stream over next two years. Overall portfolio occupancy remains tight, at 99.5%, with a healthy weight average lease expiry (WALE) of 6.1years.

Office sector rentals still falling but leasing has picked up. 

  • Grade-A office rentals declined 2% QoQ in 3Q16 (4% in 2Q16) and have fallen 15% YoY to SGD9.30psf per month, according to CBRE. 
  • On the positive side, office net absorption turned positive at 820,417 sq ft in 3Q16 after four consecutive quarters of net negative absorption. 
  • While the pick-up in overall office sector leases is positive, we note that most of the new leases signed point to shifting demand – as tenants take advantage of falling office rental rates to move into bigger, more efficient office spaces in newer developments in the CBD area.

Positives priced in, so we stay NEUTRAL with a TP of SGD0.99 (from SGD0.97). 

  • We increased our FY18F DPU (+2%) after factoring in lower interest costs. Our DDM-derived TP is adjusted accordingly. 
  • Keppel REIT’s share price has jumped 20% YTD, outperforming the STI by 22%, and has factored in most of the positives. 
  • We maintain our NEUTRAL rating as we expect its share price performance to be capped by negative sector news flow from falling rental rates and rising vacancies.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-19
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.99 Up 0.970