Office REIT - CGS-CIMB Research 2018-10-30: Secular Office Upcycle Still Intact

Singapore Office REITs - CGSCIMB Research | SGinvestors.io CAPITALAND COMMERCIAL TRUST (SGX:C61U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U) KEPPEL REIT (SGX:K71U)

Office REIT - Secular Office Upcycle Still Intact




Office SREITs results wrap

  • Office REITs, with the exception of OUE Commercial Trust (SGX:TS0U), have reported their 3QCY18 results. Recent numbers demonstrated continued strength of the office rental upcycle. Portfolios remain well occupied, at 83.4-99%, although there were some frictional movements on a q-o-q basis.
  • With the exception of Frasers Commercial Trust (SGX:ND8U) and Keppel REIT (SGX:K71U) which showed y-o-y DPU declines largely due to loss of income from asset divestments, DPU of office REITs improved on a q-o-q and y-o-y basis even post equity raisings, mainly to fund new accretive acquisitions.


Key observations and trends

  • While rental reversions remained a little mixed, with Keppel REIT and Suntec REIT (SGX:T82U) enjoying positive reversions and CapitaLand Commercial Trust (SGX:C61U) still seeing some slight negative reversions, the negative gap continue to narrow q-o-q. Frasers Commercial Trust continues to feel headwinds from the Alexandra Technopark (ATP) where the space backfilling process is ongoing. With HP to vacate its remaining 93k sq ft (c.3.4% of portfolio NLA) at ATP in 4QCY18, we anticipate Frasers Commercial Trust’s earnings to stabilise only from 2019 onwards.
  • We believe office REITs would continue to explore inorganic growth opportunities, both in Singapore and overseas.


Reiterate Overweight on office sector

  • Urban Redevelopment Authority (URA) data showed that signing rents for Category A and B offices continued to rise 1.8%/1.1% q-o-q in 3Q18 (9M +9%/4.1%) while 484k sq ft of office space was taken up in 3Q (9M: 1.43m sq ft). A notable observation is that the speed of increment in Grade B rents has picked up q-o-q, rising 1.1% vs. +0.5% q-o-q in 2Q.
  • Island-wide occupancy rose to 87.8%. With minimal supply of 0.8m and 1.3m sq ft of new office space completing in 2019-2020, we remain positive on the office rental cycle.
  • Downside risks to our view include economic slowdown resulting from escalating trade tension, which would erode appetite for office space.


Sub-sector pick remains CCT

  • CapitaLand Commercial Trust has 14% of expiring portfolio income coming from its office leases in FY19 and 22% in FY20. This will enable the trust to renew into the rental upcycle. Expiring rents averaged S$10.70 psf in FY19 and S$9.55 psf in FY20 compared with CBRE’s average Grade A spot rents of S$10.45 psf in 3Q18. This should enable the trust to begin enjoying positive rental reversion in 2019, in our view.


Moving SUN up in preference

  • We move Suntec REIT up to second preferred spot. We anticipate contributions from the new office and retail leases signed in 2H18 to impact SUN positively from FY19 onwards.
  • While we think Suntec REIT and Keppel REIT could likely experience some income volatility during HSBC’s relocation to MBFC2 from 2H19-Apr20, MBFC1&2 accounts for a smaller 17% of Suntec REIT’s 3Q18 property income vs. 22% of Keppel REIT’s income. Suntec REIT has a higher 10.9% of office NLA to be renewed in FY19, thus enabling then to ride the rental upcycle vs. Keppel REIT’s 7.6%. That said, we expect Keppel REIT to benefit from positive reversions when the remaining 7% of renewal/review leases in FY18 are re-contracted.


Highlighted Companies


CapitaLand Commercial Trust

  • ADD, Target Price S$1.90.
  • CapitaLand Commercial Trust is the largest listed office REIT with AUM of S$11.1bn spread over Singapore (95%) and Germany (5%).

Keppel REIT

  • ADD, Target Price S$1.34.
  • Keppel REIT has S$8.5bn AUM of which 87% is located in Singapore and 13% in Australia, spread over 3.7m sq ft of attributable NLA.

Suntec REIT

  • ADD, Target Price S$2.06.
  • Suntec REIT has an attributable 4.76m sq ft of office, retail and convention space in Singapore and Australia, valued at S$9.6bn.





LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-30
SGX Stock Analyst Report ADD MAINTAIN ADD 1.900 SAME 1.900
ADD MAINTAIN ADD 2.060 SAME 2.060
ADD MAINTAIN ADD 1.340 SAME 1.340



Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......