REIT - CIMB Research 2017-06-22: Let’s Go For A Bus Ride!


REIT - Let’s Go For A Bus Ride!

  • We brought a group of local investors to three distinct business park clusters: 
    1. Singapore Science Park, 
    2. one-north and 
    3. Changi Business Park.
  • Given easing supply and demand from science, technology and media sectors, we believe that business parks would be the first to post recovery gains this year.
  • A flattening/declining yield curve and abating supply pressures in 2018 underpin our Overweight stance on the sector. Risks include rate hikes or economic recession.
  • We believe that the positive view on business park recovery and further acquisitive DPU growth have been largely priced in for AREIT.
  • Instead, our preferred picks are FLT, MAGIC and MCT.

Let’s go for a bus ride! 

Business parks to recover first 

  • We reiterate our view that business parks would be the first sub-asset class to post recovery gains this year, given easing supply and demand from science (including biomedical), technology (including fintech) and media sectors. 
  • Next, we expect Grade A office to bottom out at end-17. Plagued by strong completions this year, we believe that warehouses and hotels would only recover in 2018. 
  • While we agree with consensus that retail is gripped by structural challenges, and it is difficult to pinpoint a recovery, we expect suburban malls to remain resilient.

1Q17 data points underscore our positivity 

  • Amid the lack of new supply, occupancy of business parks increased 1% pt qoq to 84% in 1Q17 (according to government agency JTC), marking the third consecutive quarter of increased take-up. 
  • Rents also remained steady. With very little supply post-16, we project occupancy to increase to 88.5% by end-17F and 92.4% by end-18F. We believe that rents would start to strengthen when island-wide occupancy meets the 90% mark; and expect capital values to move in tandem.
  • Some of the notable incoming new supply in 2018 includes FM Global’s new purpose-built facility in the Singapore Science Park (c.100k sq ft) and Kingsmen Creative’s new headquarters in Changi Business Park (c.113k sq ft). These are single-user facilities.
  • For 2019, Jones Lang LaSalle (JLL) projects new supply to increase to 700k sq ft, stemming from three multiple-user business park developments. Two of the developments obtained provisional planning permission (PP) in 1Q17.
  • Specifically, Boustead’s upcoming project at Media Circle within Mediapolis in one-north (c.173k sq ft) obtained PP in Feb 17. From our site-tour, we observed that construction for the development has commenced. 
  • Second, the redevelopment of Fleming and Faraday (c.221k sq ft) in Singapore Science Park obtained PP in Jan 17. 
  • The third project involves the redevelopment of Aquarius in Singapore Science Park which could potentially yield 300k sq ft of business park space.

Kick the tyres: from West to East 

Singapore Science Park 

  • For our first stop, we visited Ascent in Singapore Science Park. Singapore Science Park is the island-state’s first “park-like” development developed in 1982 by the then Technology Parks (now known as Ascendas-Singbridge Group). The park is home to many research and technology companies such as Defence Science Organisation National Laboratories, Defence Science and Technology Agency, Avaya, Quintiles and Shimadzu.
  • Ascendas REIT (AREIT) (Rating: Hold, Target Price: S$2.59) owns a total of 11 properties in Singapore Science Park with aggregate NLA (net leasable area) of c.273k sq m. Of which, the most recent acquisition is 12, 14 & 16 Science Park Drive, which was completed in Feb 2017. Underpinned by 100% occupancy, 16.5 years WALE (weighted average lease expiry) and average built-in escalation of 2.2-2.5% p.a., the single-tenanted buildings were acquired for S$420m or 6.3% NPI entry yield.
  • Meanwhile, Ascendas-Singbridge owns seven properties in Singapore Science Park with an aggregate NLA of 92k sq m.
  • Ascent is Ascendas-Singbrige’s latest development in Science Park and was completed last year. The property is located at the gateway of Singapore Science Park 1 and is a 5-minute walk to the Kent Ridge MRT station. It is a 7- storey integrated development offering c.40k sq m of business park space, plus 4k sq m for retail and F&B outlets.
  • We were impressed with the property’s large floor plates, green landscaping and innovative use of space (i.e. lobby concept). We believe that Ascent is around 95% occupied. Its anchor tenants include 
    1. Johnson & Johnson (which has relocated from The Strategy in International Business Park, and is taking up more space vs. its previous premise), 
    2. global pharmaceutical company, Merck and 
    3. Dyson, the British technology company which is famous for its bladeless fans. It was reported that Dyson opened its new S$587m Singapore Technology Centre in Ascent in Feb 2017.
  • Undoubtedly, one of the highlights of the site tour was the visit to co-working space operator Spacemob, which recently leased c.14k sq ft of space in Ascent. We believe that Spacemob is the first to provide co-working space in a business park. In line with JTC requirements, only qualifying tenants/activities are allowed to subscribe for Spacemob membership. Typical qualifying activities include high technology, R&D, e-businesses, media, back-office functions, and other highvalue added, knowledge-based activities. Bundled with services (i.e. payroll, WIFI, 24/7 access, meeting room bookings, snacks), Spacemob provides a range of membership plans from basic to fixed desk, which are priced from S$50/month to S$550/month.


  • Next, we took a 10 minute drive to one-north, which is Singapore’s latest generation business park. one-north is unique in the sense that it has specialised industrial parks and estates to enable greater synergy from industrial clustering. It also has a higher emphasis on an integrated masterplan of “WorkLive-Play”.
  • To illustrate, the 200-ha park houses three distinct clusters catering to three distinct industries. They include Biopolis (for biomedical companies), Fusionopolis (mainly for information, communications and technologies sector) and Mediapolis (for medial and design companies). There is also significant retail area within Fusionpolis sprouting across the entire business park.
  • Our visit corroborates with the above. Compared with second-generation parks such as International Business Park and Changi Business Park, we felt that one-north was more built-up, had more infrastructure and amenities, and was generally livelier.
  • Here, we visited SBREIT’s (Not Rated) crown jewel, the iconic state-of-the-art Solaris. Solaris’ distinctive features are its continuous spiral landscaped terrace winding up to the roof garden, a green view corridor with central courtyards and a solar shaft which helps to create a naturally ventilated day-lit grand atrium.
  • The property itself comprises two blocks of a nine-storey tower and a 15-storey south tower, with aggregate NLA of c.42k sq m. Due to JTC moratorium (where land bought from JTC cannot be sold within five years), Solaris is master leased to sponsor. The master lease expires on 15 Aug 2018. 
  • Underlying occupancy of the property is 99.3% (as at 1Q17), with underlying WALE of 2.5 years and underlying average passing rent of S$5.40-5.60 psf pm Meanwhile, the implied passing rent from the master lease is about S$5.40 psf pm.
  • Anchor tenants of Solaris include 
    1. government agency, SPRING Singapore, which has signed a 10-year lease (commenced in 2010) and fully occupies the 15% “white” space; 
    2. Taiwanese fabless semiconductor company, Mediatek
    3. American MNC software company, Autodesk; and 
    4. global publishing company, John Wiley & Sons.
  • We visited John Wiley & Sons’ premises and observed that the tenant had incurred considerable capex in fitting out the space for their use. For example, it has installed flexible meeting spaces which can be converted or expanded into a town hall for over 100 employees. We deem that the fit outs are comparable to those at CBD commercial space, and demonstrate Wiley’s commitment to take up space for the longer term. We note that Wiley is in its third renewal cycle at Solaris.

Changi Business Park 

  • Our third and final stop brought us to Changi Business Park, which is located in the eastern region of Singapore and is in the vicinity of Singapore Changi international airport. 
  • Launched in 1997 by JTC, Changi Business Park is a second-generation business park and is a reputed back office hub for financial institutions such as Citibank, Standard Chartered, DBS and UBS.
  • We visited two properties in Changi Business Park, Ascendas REIT (AREIT)’s ONE@Changi City and Viva Industrial Trust (VIT)’s (Not Rated) UE BizHub East. Recall that AREIT acquired the business park component of ONE@Changi City for S$420m or 6% NPI entry yield. Including ONE@Changi City, AREIT has seven properties within Changi Business Park.
  • ONE@Changi City and neighbouring UE BizHub East are the only two mixed-use developments in the business park. 
    • ONE@Changi City is part of a 4.7ha integrated development comprising Changi City Point mall and Capri by Fraser hotel residences. It is linked to the East-West MRT line as well as the upcoming Downtown MRT line (expected to be completed by 4Q17). The property is a nine-storey multi-tenanted building with c.63k sq m NLA. ONE@Changi City’s key tenants include JPMorgan and Credit Suisse. We understand that these two financial institutions take up more than half the space of the building. Occupancy of the property is around 98%, with WALE of over four years and average passing rent of about S$4 psf pm.
    • UE BizHub East comprises two business park buildings (two nine-storey office towers) with retail space component and a hotel. Aggregate NLA of the property is c.62.3k sq m. Likewise, UE BizHub East is directly connected to the upcoming Downtown MRT line. Key tenants of UE BizHub East (business park component) include 
      1. MNC technology conglomerate, Cisco Systems
      2. British MNC Telco services, BT; and 
      3. Mizuho Bank
      As at 1Q17, occupancy of the business park component is c.88%, with WALE of around 3.2 years and average passing rent of about S$4 psf pm.
  • During our site visit, we also visited the hotel component, which is managed under the “Park Avenue” brand and master leased to United Engineers (UEM SP, Not Rated) for 10 years from Nov 2013. The 251-room hotel is one of the three business hotels in the vicinity. The other two are Capri by Fraser hotel residences and OUEHT’s (Rating: Add, Target Price: S$0.71) Crowne Plaza Changi Airport
  • All in all, we found the hotel visit to be pleasant. The hotel is positioned as a mid-tier business executive hotel catering to the MNCs located in the eastern park of Singapore. Some of the key corporate clients include Standard Chartered Bank, Ericsson Telecommunications and DBS. We understand that underlying occupancy rate of the hotel is in the mid-to-high 80s and average room rates are in the high-hundreds.

Overweight maintained; preferred picks 

Maintain Hold on AREIT 

  • A flattening/declining yield curve and abating supply pressures across all sub-sectors in 2018 underpin our Overweight stance on the sector. Risks to our call include faster-than-expected rise in interest rates or macro growth contraction.
  • Among the industrial S-REITs, AREIT has the largest market share for business parks, and is expected to benefit from improving demand-supply dynamics. However, we believe that both the positive view on business park recovery and further acquisitive DPU growth has been largely priced in. 
  • AREIT is the third-best performing S-REIT in the sector, gaining c.17% YTD. The stock is trading at 6.0% FY18 dividend yield and 1.29x current P/BV. We believe that the market has partly rewarded the trust for divesture of its non-core Chinese assets and potential recycling into Singapore/Australian assets. 
  • As at 1Q17, AREIT’s aggregate leverage stood at 33.8%. Assuming a gearing limit of 40%, we estimate that the trust has available debt headroom of c.S$1.1bn. We believe that the REIT could look to deepen its exposure in Singapore/Australian business parks as well as potential development/redevelopment opportunities in Singapore and Australia.

Preferred picks are FLT, MAGIC and MCT 

  • Instead, our preferred picks remain Frasers Logistics & Industrial Trust FLT (Rating: Add, Target Price: S$1.10), Mapletree Greater China Commercial Trust MAGIC (Rating: Add, Target Price: S$1.14) and Mapletree Commercial Trust MCT (Rating: Add, Target Price: S$1.70). We like the trio due to relative valuations/performance.
  • Post the acquisition catalyst, we believe that the market would continue to rerate FLT on DPU growth from inorganic contributions and strengthening Aussie dollar. Hence, DPU in Singapore dollar terms would be higher, despite underlying Aussie-dollar organic growth being largely muted.
  • Meanwhile, we like MAGIC for its resilient portfolio, backed by Festival Walk. We also deem it a proxy for nascent Hong Kong retail recovery (which has showed initial signs of bottoming out). Downside risks are a weaker-than-expected Beijing office market.
  • We like MCT’s portfolio as it has a good blend of resilience (through the more stable business park rents) as well as growth coming from Vivocity. We believe that Vivocity and Mapletree Business City will continue to deliver stronger growth than their peers. Catalysts could include faster-than-projected rental uplift.

Highlighted companies 

Frasers Logistics & Industrial Trust 

  • ADD, TP S$1.10, S$1.05 close 
  • We like FLT as it is the largest pure-play proxy for Australian industrials. Post the acquisition catalyst, we believe that the market would continue to re-rate FLT on DPU growth from inorganic contributions and the strengthening Aussie dollar.

Mapletree Commercial Trust 

  • ADD, TP S$1.70, S$1.56 close 
  • We like MCT’s portfolio as it has a good blend of resilience (through the more stable business park rents) as well as growth coming from Vivocity. We believe that Vivocity and Mapletree Business City will continue to deliver stronger growth than its peers.

Mapletree Greater China Commercial Trust 

  • ADD, TP S$1.14, S$1.07 close 
  • We like MAGIC for its resilient portfolio, backed by Festival Walk. We also deem it a proxy for the nascent Hong Kong retail recovery (which has shown initial signs of bottoming out).

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-06-22
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