Singapore Office REITs - OCBC Investment 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

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.

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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 | https://www.iocbc.com/ 2018-09-04

SGX Stock Analyst Report BUY Maintain BUY 1.530 Same 1.530

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