Office REITs - UOB Kay Hian 2020-04-09: Sturdy & Resilient


Office REITs - Sturdy & Resilient

  • While demand for office space is affected by a slowdown in the broader economy, we expect office REITs to be more resilient relative to retail REITs and hospitality REITs. 
  • Upgrade to OVERWEIGHT.
  • Maintain BUY for premier Grade-A office landlord CapitaLand Commercial Trust (SGX:C61U) (Target: S$1.70).
  • Upgrade Keppel REIT (SGX:K71U) to BUY (Target: S$1.30). Keppel REIT share price has corrected 24.2% ytd and 2020F distribution yield has improved to 6.0%. Contribution from 311 Spencer Street at Melbourne will kick in starting 2Q20.

COVID-19 strikes fatal blow to co-working.

  • Many office workers are now working from home due to the COVID-19 pandemic. Co-working operators are badly affected as most of their tenants are on flexible short-term leases, which can be terminated by giving a 30-day notice. Many co-working operators have seen footfall drop by 50%. The average booking period has also dropped from three months to just a few hours. The flexibility that co-working operators provide has turned around to haunt them.
  • Co-working accounts for 13% of the office market in the US. In Singapore, co-working is much smaller at 5% of the office market. According to Colliers International, WeWork has the largest market share of 22.0% for co-working office space in Singapore, followed by IWG at 16.6% and JustGroup at 12.8%.

WeWork in dire straits.

  • WeWork failed in its IPO attempt in 3Q19 and subsequently terminated 2,400 employees last November. According to its prospectus, one quarter of WeWork’s customers are on month-to-month leases. Many of WeWork’s shared offices lie empty with COVID-19 now spreading widely. Management is also struggling to renegotiate lease terms with their landlords. SoftBank, WeWork’s strategic shareholder, has just withdrawn from its planned bailout to inject US$3b into WeWork on 1 Apr 20.

Neutral impact from property tax rebate.

  • The government has granted property tax rebate of 30% for office properties. The rebates have neutral impact on office REITs as they have to fully pass the rebates on to tenants.

Office properties less affected by COVID-19 pandemic.

  • The COVID-19 pandemic has resulted in many tenants activating Business Continuity Plans. Many companies operate with some staff working at the office and some staff working from home. Tenants are apprehensive and have adopted a wait-and-see approach. The prevalence of remote working has also reduced the demand for new office space.

CapitaLand Commercial Trust (SGX:C61U) (BUY / Target: S$1.70)

Exposure to co-working.

  • CapitaLand Commercial Trust has embarked on AEI for 21 Collyer Quay (previously known as HSBC Building) to upgrade common and lettable areas and essential equipment from 2Q20 to 4Q20. The HSBC lease expires in Apr 20. The new 7-year lease with WeWork Singapore for the entire building will commence in 2Q21.
  • Given that WeWork is financially distressed, we have assumed that CapitaLand Commercial Trust would be able to backfill 50% of the office space at 21 Collyer Quay when the building commence commercial operations in 2Q21.

Assuming soft occupancy at CapitaSpring.

  • CapitaLand Commercial Trust secured its first anchor tenant for CapitaSpring, JP Morgan, which took up close to a quarter of NLA in 1Q18. Committed occupancy has since ramped up to 34.8% as of Dec 19. CapitaSpring is expected to complete in 1H21.
  • We assumed that CapitaSpring will commence commercial operations with occupancy at 70% in 2Q21, given the slowdown caused by Covid-19 pandemic.

Arbitrage opportunity already seized.

Rental relief to help tenants cope with COVID-19 pandemic.

Defensive strength from long WALE.

Keppel REIT (SGX:K71U) (Upgrade to BUY / Target: S$1.30)

Singapore office to maintain positive reversions.

  • Management disclosed that the average rents for expiring leases are S$9.69psf pm for 2020, S$9.74psf pm for 2021 and S$10.20psf pm for 2022, which are below current market rent of S$11.55psf pm for Grade-A office space within core CBD.
  • Keppel REIT should maintain positive reversions for its Singapore office portfolio in 2020 and 2021.

311 Spencer Street, Melbourne to start contributing in 2Q20.

  • The 40-storey freehold Grade-A office building has already topped out with completion of building structure. It will be internally fitted out in the coming months. The buildings will be leased to Victoria Police for 30 years commencing in 2Q20. The lease has fixed annual escalation of 2-4% per year.
  • Management expects 311 Spencer Street to generate NPI yield of 6.4% on development cost of S$362.4m.

Minimal exposure to co-working.

  • Co-working operators accounted for 0.8% of Keppel REIT’s NLA and 0.7% of Gross Rental Income.

Rental relief to help tenants cope with COVID-19 pandemic.


  • Lower interest rates and wider yield spread.


  • We assumed that occupancy for office buildings in Singapore taper off to 90% by end-20 due to economic slowdown caused by the COVID-19 pandemic.
  • We expect rents for Grade-A office space within core CBD to drop 9.1% to S$10.50psf pm in 2020 and drop another 4.8% to S$10.00psf pm in 2021.


  • COVID-19 pandemic has resulted in many countries imposing lockdown, which restrains economic activities.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-09
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