Singapore Office REITs - OCBC Investment 2018-09-04: Strong Rental Momentum, Tight Transaction Yields

Singapore Office REITs - OCBC Investment Research 2018-09-04: Strong Rental Momentum, Tight Transaction Yields Singapore Office REITs FRASERS COMMERCIAL TRUST SGX:ND8U SUNTEC REAL ESTATE INV TRUST SGX:T82U CAPITALAND COMMERCIAL TRUST SGX:C61U

Singapore Office REITs - Strong Rental Momentum, Tight Transaction Yields

Office rents continued its growth trajectory

  • Leasing momentum for the office sector continued to gain traction, with Grade A core CBD office rents growing 4.1% q-o-q to S$10.10 psf/month in 2Q18, according to CBRE’s data. This was the fourth consecutive quarter of growth, following 1Q18, 4Q17 and 3Q17’s 3.2%, 3.3% and 1.7% sequential growth to S$9.70 psf/month, S$9.40 psf/month and S$9.10 psf/month, respectively. This trend was also mirrored by the Grade B core CBD sub-market, which saw a 2.6% q-o-q increase in rents to S$7.80 psf/month.
  • Occupancy rates remained stable at 94.1% for Grade A core CBD, and 94.2% for Grade B core CBD. There was positive net absorption of 617.1k sq ft and 15.0k sq ft for the former and latter in 2Q18, respectively.
  • Based on property consultants’ reports and our conversations with office REITs, demand continued to be driven by co-working operators, financial services, business consultancy and the Technology, Media and Telecom sectors. For example, Suntec REIT secured a co-working space operator, WeWork, to take up ~36.5k sq ft of NLA over two floors at Tower 5 of Suntec City Office, with operations expected to commence in 4Q18. Starhill REIT also found success within this space, with the addition of The Great Room, a co-working operator, which commenced its operations in Jun at Ngee Ann City by taking up 15k sq ft of space.

~ ~ Where SG investors share

Attractive exit yields for office REITs’ recent divestments

  • There were two notable recent office transactions.
    • On 29 Jun, CapitaLand Commercial Trust announced its proposed divestment of Twenty Anson, a 20-storey office building in Tanjong Pagar, to an unrelated third party for a sale consideration of S$516m (S$2,503 psf on NLA), and this translates into a net property income yield of 2.7%.
    • Frasers Commercial Trust also received a staggering offer for its 55 Market Street property in Jul. The sale consideration of S$216.8m, or S$3,020 psf NLA, came in at a 44.5% premium above the property’s valuation and translates into an annualised net property income yield of 1.7%.
  • We believe the transactions reflect the attractiveness of office assets in Singapore amid a recovering rental cycle and benign upcoming supply in the near-term. Our preferred office REIT is Frasers Commercial Trust [Rating: BUY; Fair Value: S$1.53].

Andy Wong Teck Ching CFA OCBC Investment Research | 2018-09-04
SGX Stock Analyst Report BUY Maintain BUY 1.530 Same 1.530
HOLD Maintain HOLD 1.840 Same 1.840
HOLD Maintain HOLD 1.690 Same 1.690