Office REITs Singapore - UOB Kay Hian 2019-08-27: Tight Vacancies Cushion Impact From Macro Headwinds


Office REITs ‒ Singapore - Tight Vacancies Cushion Impact From Macro Headwinds


Rents continue to edge higher.

  • Grade A Office rents for the core CBD surged 11.9% y-o-y to S$11.30psf pm in 2Q19. By micro market, Grade A office rents increased the strongest at Beach Road/Bugis due to tight vacancy at 1.7%. However, sequential increase in rents has moderated from 3.2% q-o-q in 1Q19 to 1.3% q-o-q in 2Q19, reflecting the cautious and uncertain macro outlook but remains in positive territory.
  • Demand for office space was generated mainly by the Technology, Media & Telecommunications (TMT) sector and co-working operators in 2Q19:
    1. TMT: Zebra Technologies (data capture and automatic identification) committed to one floor at Frasers Tower (17,450sf). Business news broadcaster CNBC took up space at 18 Robinson, which was completed in 1Q19. There is healthy demand from smaller IT companies and start-ups.
    2. Co-working operators: WeWork committed to three floors at UE Square (51,000sf) and one additional floor at Mapletree Anson (17,380sf). The co-working operator also took up two floors at Funan (North Office Block).

Healthy leasing interest for new developments.

  • Funan’s two Grade-A office blocks with NLA of 214,000sf were completed in 2Q19 and are 98% pre-committed. The South Office Block is fully leased to three government agencies - Attorney General’s Chambers, Department of Statistics and Smart Nation & Digital Government Office. The North Office Block houses sporting goods company Adidas, Dutch payment platform Adyen and co-working operator WeWork.

Pick-up in net absorption drives vacancy lower.

  • Net absorption of office space on an island-wide basis picked up from 137,900sf in 1Q19 to 508,400sf in 2Q19. The pick-up in net absorption drives vacancy rate for Grade A core CBD further down by 0.9ppt q-o-q to a low of 3.9%, levels seen prior to the supply glut in 2017. Occupancy rate has correspondingly improved by 0.9ppt q-o-q to 96.1%.


Tenants have turned cautious due to increased uncertainties.

  • Most tenants prefer to renew their leases, instead of incurring additional expenses to relocate. Leasing deals are taking a longer time to get concluded as tenants are reluctant to accept landlords’ expectations for higher rentals. Business sentiment has been affected by escalation of trade conflicts. Some American and European banks, such as Deutsche Bank, have right-sized their operations to reduce costs.

New supply tapers off from 2019 to 2021.

  • The limited supply is caused by the reduction in government land sales in recent years. Core CBD supply is meagre at 0.1m sf in 2H19 (HD 139), which should underpin stability in rentals. HD139 is fully committed. 9 Penang Road at Fringe CBD is also fully committed (UBS took up all eight floors). Woods Square at Woodlands Regional Centre is 45% pre-committed.
  • Future supply is estimated at 3.85m sf for 2019-21, representing an average of 1.28m sf p.a. (33% below 10-year average of 1.91m sf). Supply would subsequently pick up to 1.86m sf in 2022 due to the Central Boulevard Towers and Guoco Midtown.


Achieved positive rental reversion in 1H19.

  • 27% of NLA for CapitaLand Commercial Trust's office space is up for renewal in 2019, of which 22% has already been completed (only 5% to be renewed in 2H19). Committed rents were at S$11.87-13.50psf for AST2 (expired rent: S$10.58psf), S$12.90-13.20psf for Six Battery Road (expired rent: S$11.70psf) and S$12.00-13.30psf for CapitaGreen (expired rent: S$11.62psf) in 2Q19.
  • We expect positive rental reversions for Capital Tower, CapitaGreen and Raffles City in 2H19.

Opportune timing for launch of CapitaSpring.

  • 51-storey CapitaSpring (redevelopment of Golden Shoe Car Park) with 635,000sf of office space, 12,000sf of retail space and food centre of 44,000sf is scheduled for completion in 1H21. Supply of new office space is manageable at only 899,781sf in 2021, which poses minimal competition for CapitaSpring (Rochester Commons with 264,781sf of office space is located at one-north). The marketing show suite is ready and leasing activities have commenced. JPMorgan has committed to 155,000sf or 24% of NLA at CapitaSpring.

Thoughtful overseas expansion.

  • CapitaLand Commercial Trust completed the acquisition of a freehold office building Gallileo in Frankfurt’s Banking District for €356m or NPI yield of 4.0% in Jun 18. The acquisition is partially funded by a loan of €212m with interest rate at 1.4%, which provides a natural hedge.
  • It plans to increase depth in selected gateway cities in Germany, such as Berlin, Munich, Hamburg and Dusseldorf. Management plans to cap exposures to overseas markets at 20% of deposited properties.
  • Entry price is S$1.85.

KEPPEL REIT (SGX:K71U) (HOLD; Target Price: S$1.21)

Strong defensive qualities.

  • Keppel REIT has only 1.6% of portfolio NLA for renewal in 2H19. However, its WALE was at 5.3 years as of Jun 19 (Singapore: 4.2 years, Australia: 9.4 years, South Korea: 2.5 years), already one of the longest WALEs for Singapore REITs. WALE would be longer at 8.3 years if we include 311 Spencer Street. Its top-10 tenants’ WALE is at 7.5 years.

Further expansion Down Under.

  • The development of 311 Spencer Street in Melbourne is progressing smoothly with the superstructure for 24 floors already completed. The 30- year lease to the Victoria Police will commence when the building is completed in 1H20. The building will provide recurrent income stream with fixed annual rental escalations. It provides NPI yield of 6.4%.

Maiden acquisition in Seoul.

  • Keppel REIT has announced the proposed acquisition of T Tower in Seoul at an agreed value of ₩252.6b (S$301.4m). T Tower provides an NPI yield of 4.7%. The acquisition is expected to boost pro-forma 2018 DPU by 2.5% to 5.70 S cents. The proposed acquisition will be funded by debt, split between a ₩-denominated loan with interest rate at sub-3% and proceeds from the issuance of S$200m 1.90% convertible bonds. The acquisition was completed in 2Q19.
  • Entry price is S$1.10.

SUNTEC REIT (SGX:T82U) (HOLD; Target Price: S$1.96)

Office portfolio resilient.

  • 24.9% of NLA for Suntec City Office is up for renewal in 2019, of which 23.4% is already completed (only 1.5% to be renewed in 2H19). Leases with office NLA of 180,000sf were signed with positive rental reversion of 7.9% in 2Q19.
  • Committed occupancies for Suntec City Office, One Raffles Quay and Marina Bay Financial Centre were healthy at 99.1%, 97.0% and 100% respectively.

Some signs of weakness at Suntec City Mall.

  • 33.4% of NLA for Suntec City Mall is up for renewal in 2019, of which 20.1% is already completed. Leases with retail NLA of 77,000sf were signed with positive rental reversion at 5.3% in 2Q19. Occupancy at Suntec City Mall has improved slightly by 0.6ppt q-o-q to 98.3%. Tenant retention ratio improved to 64% (1Q19: 39%).

9 Penang Road achieves 100% pre-commitment for office.

  • The office component of 9 Penang Road (previously known as Park Mall) was 100% pre-leased to UBS, which will occupy all eight floors across two wings with NLA of 381,000sf. The move will bring 4,000 employees currently working at One Raffles Quay and Suntec City under one roof to enhance collaboration. Pre-leasing for the retail component with NLA of 15,000sf is on-going and has received strong interest from specialty shops and F&B outlets. 9 Penang Road is scheduled to complete in 4Q19.
  • Suntec REIT owns a 30% stake in 9 Penang Road.
  • Entry price is S$1.79.


  • Higher office rentals and positive newsflow on leasing activities.
  • Interest rates are expected to drift sideways for the foreseeable future.


  • We maintain our existing earnings forecasts.


  • Higher government bond yields, which we believe is unlikely.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-27
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