Singapore Office REITs - DBS Research 2016-11-09: Bullish signal from developers

SGinvestors.io

KEPPEL REIT K71U.SI CAPITALAND COMMERCIAL TRUST C61U.SI OUE COMMERCIAL REIT TS0U.SI FRASERS COMMERCIAL TRUST ND8U.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

Singapore Office REITs - Bullish signal from developers

• Central Boulevard office sold on implied price in excess of S$3,000 per square foot on a gross development basis.
• Signals confidence on outlook for the Singapore office market.
• Singapore office REITs undervalued given high land prices and construction costs.
• Top pick – Keppel REIT (BUY, S$1.23 TP).

Record bid for land site. 

• The Central Boulevard site was keenly contested given that it allows the development of up to 1.52m square feet (sqft) of commercial space post the near term jump in supply.
• IOI Properties placed the highest bid with a record price of S$2,569m, which translates to S$1,689 per sqft of gross floor area (GFA). This is higher than the S$1,409 per sqft paid by Macquarie for the Asia Square 1 site in 2007.

Both overseas and Singapore developers bullish on Singapore office. 

• Assuming a Premium Grade A office tower with 5,000 square metres (sqm) of retail GFA is constructed, we estimate the breakeven cost for IOI Properties to be between S$2,780-2,942 per sqft of net lettable area (NLA). 
• On a gross development value basis assuming a 10% development margin, the implied price per sqft of office NLA is S$3,090- 3,275. 
• While some investors may dismiss IOI Properties’ bid given it is a foreign developer, bids by developers with extensive experience in Singapore such as Mapletree, CapitaLand, Hongkong Land and Cheung Kong, indicate they remain bullish on the Singapore office market. Their bids implied S$2,500-$2,900 per sqft of NLA on a completed basis, consistent with recent market transactions including purchases made by sovereign wealth funds and existing valuation of various properties owned by the office REITs.

Office SREITs trading below replacement costs. 

• Beyond the bullish signal by developers on the medium outlook for the Singapore office market, the bids made including those submitted by developers who manage various SREITs, demonstrate the mispricing and undervalued status of the office REIT sector. 
• The Singapore portfolios of various office SREITs are trading at an implied price per sqft (by NLA) of between S$1,900-S$2,450. This is significantly below the S$3,000 per sqft implied from IOI Properties’ bid and replacement costs of c.S$2,800 per sq ft. Thus we retain our overweight call on the sector with Keppel REIT (KREIT; BUY, TP S$1.23) as our top pick. 
• We like KREIT given it has the least tenancy risk among the office SREITs, with no leases up for renewal in 2016 and only 5% due to expire in 2017. In addition, its Singapore office portfolio which is the most comparable to buildings in recent market transactions and the proposed office block on the Central Boulevard site trades at a substantial discount, at an implied price of c.S$2,450 per sqft.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-11-09

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