Office Sector - OCBC Investment 2019-03-12: Rentals Likely To Continue Upward Trajectory But At Moderated Pace

Singapore REITs - OCBC Investment Research | SGinvestors.io FRASERS COMMERCIAL TRUST (SGX:ND8U)

Office Sector - Rentals Likely To Continue Upward Trajectory But At Moderated Pace


Office rents closed 2018 strongly with sustained leasing momentum

  • CBRE statistics showed that office rental rates continued its uptrend in 4Q18, with Grade A and Grade B core CBD rents growing 3.3% and 3.8% q-o-q to S$10.80 and S$8.30 psf/month, respectively. Office rents have increased sequentially for six consecutive quarters since 3Q17, and are up 20.7% (core Grade A CBD) and 14.5% (core Grade B CBD) from the trough.
  • If we delve into the various micro-markets by drawing reference from Savills’ data, office rents in 4Q18 grew the highest in Marina Bay (+4.8% q-o-q), followed by Raffles Place (+3.5%) and Tanjong Pagar (+3.2%). This was boosted by premium rents in new prime grade developments such as Marina One and Frasers Tower.
  • For the whole of 2018, Grade A core CBD rents are up 14.9% while Grade B core CBD rents are up 11.4%, according to CBRE data.



Positive net absorption trend continued

  • Singapore’s islandwide office net absorption came in at 419.8k sq ft in 4Q18, based on URA statistics. This was a continuation of the positive trend (seven consecutive quarters), although it was a slight moderation from the 484.4k sq ft of completed office space occupied in 3Q18.
  • The vacancy rate as at end-4Q18 stood at 12.1%, versus 12.0% as at the end of the preceding quarter.


Co-working spaces are working out

  • Co-working operators and technology companies were the top two drivers of growth for office space take-up in 2018. A study conducted by Monk’s Hill Ventures and Slush Singapore found that Singapore was the top recipient for start-up funding in Southeast Asia with a record S$11.5b investments from 2013-2018, and received more than 50% of all transactions in the region for four out of five years. We believe this influx of venture capital funds is expected to drive office space demand from start-ups, which in turn will serve as a catalyst for co-working operators to expand.
  • In the past year, office space occupied by co-working spaces has doubled to 1.4m sq ft from 0.7m sq ft in 2017, according to CBRE. Competition is intense with VC-backed players like WeWork and JustCo on aggressive capital-intensive expansion strategies while new entrants like Hong Kong’s Campfire Collaborative Spaces have also decided to jump into the scene. In addition, the size of co-working spaces has multiplied more than ten-fold from an average of 5k-10k sq ft in 2013 to 60k sq ft in 2018. Upon completion in 3Q19, Campfire’s site will span 85k sq ft including all 16 floors at 139 Cecil Street and a rooftop sky pool and bar.
  • Conversely, there could be some fatigue from the co-working operators after their aggressive expansion over the past couple of years, while uncertainties exist over the impact on underlying utilisation rates of the co-working spaces should an economic downturn hit.


Limited supply pipeline in near-term to remain supportive of office rental growth, but at a moderated pace

  • 600k sq ft of net new office supply was added islandwide in 4Q18, bringing the total new supply added in 2018 to 1.51m sq ft, based on CBRE data. Future new supply between 2019-2022 is projected to be 5.33m sq ft, averaging an annual supply of 1.33m sq ft. This is almost 30% lower than the 10-year average net new office supply of 1.88m sq ft.
  • However, given the double-digit rental growth registered in 2018 resulting in a higher-base effect, coupled with the possibility of more uncertainties in the business environment due to slowing macroeconomic conditions, we expect office rental growth to moderate in 2019. We thus forecast core Grade A CBD office rentals to grow 5%-8% in 2019.


Our only ‘BUY’ rated office REIT is Frasers Commercial Trust (FCOT) [BUY; FV: S$1.56].

  • FRASERS COMMERCIAL TRUST (SGX:ND8U) still has ample dry powder to drive inorganic growth opportunities, as seen from its gearing ratio of 28.4% (as at 31 Dec 2018). This includes potentially venturing deeper into the UK. While some are concerned about the effects of Brexit, we believe Frasers Commercial Trust would focus more on business parks with tenants across more defensive trade sectors.
  • One potential re-rating catalyst could come from the finalisation of a lease agreement with Google at Frasers Commercial Trust’s Alexandra Technopark (ATP). Based on media reports, Google has an interest in leasing ~400k sq ft at ATP. Accounting for this as well as the reduction of ~93k sq ft of space vacated by HP Singapore, ATP’s committed occupancy rate of 68.6% (as of 31 Dec 2018) would increase to ~98%. However, the caveat is that there has been no confirmation as of now.
  • Another leasing development within Frasers Commercial Trust’s portfolio stems from the announcement in Feb that WeWork will open its first Perth office in Frasers Commercial Trust’s Central Park property in Sep 2019. WeWork will occupy 7.9k sqm in the building, and transform seven of the floors into a series of shared office spaces featuring an in-house barista and multiple large boardrooms. Central Park’s committed occupancy will increase from 71.5% (as at 31 Dec 2018) to 83.5%.








Wong Teck Ching Andy CFA OCBC Investment Research | Deborah Ong OCBC Investment | Joseph Ng OCBC Investment | https://www.iocbc.com/ 2019-03-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.560 SAME 1.560



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