Singapore Office REITs - DBS Research 2017-06-22: Office Remains Alluring

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Singapore Office REITs S-REITS CAPITALAND COMMERCIAL TRUST C61U.SI FRASERS COMMERCIAL TRUST ND8U.SI KEPPEL REIT K71U.SI OUE COMMERCIAL REIT TS0U.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

Singapore Office REITs - Office Remains Alluring

Site at Beach Road gets triggered.

• URA to launch public tender for Beach Road land parcel.
• Minimum land price implies per sqft of NLA of S$2,300-2,500.
• Office REITs remain undervalued considering land prices in Singapore.
• Overweight office sector; top pick Keppel REIT (BUY, Target Price S$1.23).

What’s New 

Developer triggers reserve site at Beach Road

• URA announced that it had accepted an application from a developer to put the commercial site at Beach Road for sale by public tender.
• The reserve site was first made available on the Reserve List in November 2014 with a minimum price of S$1.138bn.
• URA will launch the public tender for the site in about two weeks’ time with the tender period lasting approximately 12 weeks.

Overview of Beach Road land parcel

• The two-hectare Beach Road land parcel has a maximum permissible GFA of 88,313 sqm (950,592 sqft) with a minimum office component of 61,820 sqm (665,424 sqft) and maximum retail space of 3,000 sqm (32,292 sqft). The remaining GFA can be used for additional office, hotel, serviced apartment and/or residential uses. In addition, a developer will need to restore the former Beach Road Police Station.
• The land parcel sits on a 99-year leasehold.
• The site is connected to the Bugis MRT interchange Station and the nearby Suntec City via a network of underground and overhead pedestrian walkways. It is also near major arterial roads and expressways such as ECP and MCE.

Implied price per sqft of NLA of S$2,300-2,500

• Based on a development with 100% Premium Grade A office tower, we estimate the breakeven cost for the project to range from S$1,697-1,826 on per sqft of GFA or $2,121-2,283 on per sqft of NLA. This is based on the following assumptions: 
  1. construction costs for a prestige CBD office of S$386-506 per sqft according to Rider Levett Bucknall, 
  2. 3% cost of funds, 
  3. 60% leverage, and 
  4. four-year construction period.
• Assuming a development margin of 10%, we estimate the implied per sqft for the office NLA to be S$2,333-2,511.

Undervalued office REITs – trading below replacement costs

• Similar to the Central Boulevard site, the tender for the Beach Road land parcel highlights the undervalued status of the office S-REITs which are trading below replacement cost. The Singapore portfolios for the various office S-REITs, which are predominately located in the CBD or more prime locations compared to the Beach Road site, are currently trading on an implied price of S$2,100- 2,500 per sqft of NLA.
• Thus, we believe investor scepticism over the value of Singapore Grade A office buildings is unwarranted and maintain our overweight status on the office sector.
• Our top pick remains Keppel REIT (Rating: BUY, Target Price S$1.23) as it has the least tenancy risks among the office S-REITs, with only 2.8% of leases due to expire for the remainder of 2017. 
• In addition, its Singapore office portfolio, at an implied price of c.S$2,500 per sqft, is at a discount to comparable buildings in recent market transactions, the proposed office block on the Central Boulevard site (implied price in excess of S$3,000 per sqft on a completed basis) and rumoured bid for Asia Square Tower 2 by CapitaLand at S$2,800 per sqft.

Note: DBSV had previously lowered Target Price of OUECT from S$0.74 to S$0.67 after incorporating the equity placement. (See: OUE Commercial REIT - DBS Research 2017-05-08: Awaiting Acquisitions)

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-06-22

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.690 Same 1.690

BUY Maintain BUY 1.520 Same 1.520

BUY Maintain BUY 1.230 Same 1.230

HOLD Maintain HOLD 0.670 Same 0.670

HOLD Maintain HOLD 1.750 Same 1.750