Singapore Property - Maybank Kim Eng 2016-10-27: The Office Snapshot

Singapore Property - Maybank Kim Eng 2016-10-27: The Office Snapshot Singapore Office REITs KEPPEL REIT K71U.SI CAPITALAND COMMERCIAL TRUST C61U.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

Singapore Property - The Office Snapshot

Retaining positive views on CCT and KREIT 

  • We stay positive on office REITs post-3Q16. 
  • Retain preference for CCT (top pick) and KREIT over Suntec REIT with the latter’s TP cut by 2% to reflect retail miss. 
  • Operating trends were not exciting, but were in line with low expectations. 
  • News flow on leasing activities showed that 2.7m sf of new office space remains unleased in the CBD. However, we believe the low supply of prime office space in 2018-20 should give the market ample time to absorb this excess. 
  • Nonetheless, the pace of rent rebound could be tempered by completion of additional space in 2021. 
  • We continue to see a bottom for office rents by early-2018 and believe clients should position in office REITs ahead of the bottom.

Key takeaways from results season for office REITs 

  • Capitaland Commercial Trust and Keppel REIT reported inline results, while Suntec REIT missed on weaker than expected retail performance. 
  • Golden Shoe’s impending redevelopment by CCT is the only material development this results season. We have not incorporated this into our forecasts pending approvals and finer details of the deal. Nonetheless, our preliminary estimates showed that this project can achieve an IRR of 7.8% over a five year period. Key assumptions include SGD714m differential premium, 4.00% exit cap rate, 95% occupancy rate and passing rent of SGD10 psf on completion. We assume that the balance lease of 64 years is not topped up to the full 99 years as was the case for CapitaGreen. 
  • Despite higher operating income, KREIT and Suntec REIT continue to support headline yields with capital distributions, which made up 5.7/6.2% of distributions. 
  • CCT achieved organic income growth of 8.1% YoY due to higher contribution from CapitaGreen. 
  • Soft signing rents for offices were broadly in line with low market expectations.

Demand: Higher absorption; Pre-commitment 

  • Preliminary data from CBRE painted a surprisingly rosy picture. 
  • While the first positive quarterly net absorption of 820k sf looks good, we caution that this statistic could be flattered by relocating tenants that have yet to exit their previous buildings. 
  • Tracking news flow on leasing activities at five new buildings in the CBD showed that 1.6m sf of space has already been leased out. 
  • In particular, the strong 80% pre-commitment at newly completed Guoco Tower was a key support to office sentiment. Another 2.7m sf remains unleased.

Supply: Position to capture a rebound 

  • CBD office supply will taper off significantly over 2018-20 beyond the well-flagged supply glut in 2016/17. 
  • Average annual addition of 0.6m sf is significantly below the average annual absorption rate of 1.0m sf over the past 7 years. This should give the market ample time to absorb the excess supply assuming demand normalizes by then. 
  • Nonetheless, the pace of rent rebound could be tempered by completion of additional space in 2021. We update our office supply pipeline to reflect potential additions. 
  • Notably, we include preliminary estimates of the amount of office space that could be added from the Central Boulevard site and Golden Shoe’s redevelopment in 2021. 
  • We continue to expect a bottom in office rents in early 2018.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-27
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.21 Same 1.210
BUY Maintain BUY 1.81 Same 1.81
HOLD Maintain HOLD 1.77 Same 1.77