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Singapore Office REITs - DBS Research 2020-12-10: Stay With Your Office Winners

Singapore Office REITs - DBS Research | SGinvestors.io CAPITALAND INTEGRATED COMM TR (SGX:C38U) KEPPEL REIT (SGX:K71U) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) OUE COMMERCIAL REIT (SGX:TS0U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Singapore Office REITs - Stay With Your Office Winners




Navigating the new office normal post COVID-19.

  • We see demand for office space emerging with a new face post COVID-19. With technology enablers and positive feedback from employees, firms should increasingly look to adopt more flexible working arrangements, with the aim of crystallising occupancy savings in the near term.
  • That said, we believe that the level of adoption will likely vary according to sectors and job scopes as it is not a one-size-fits-all arrangement. While return of space in the coming years remains an overhang, we believe that the Grade A offices, with property attributes surrounding sustainability, will continue to attract tenants and remain resilient.
  • Our picks are Keppel REIT (SGX:K71U), CapitaLand Integrated Commercial Trust (SGX:C38U) and Mapletree Commercial Trust (SGX:N2IU).


Optimism on GDP recovery to be a key driver for office sector recovery


The steepest GDP contraction is behind us and we look ahead for a recovery in line with the office sector.

  • FY20 has been an unprecedented year. We started the year with a bleak outlook when the COVID-19 pandemic hit us. However, the progressive positive turn of events has turned around sentiments as the market looks towards a recovery. The end of Circuit Breaker, progressive relaxation of restrictive movement and travel borders, and the successful containment of the pandemic in Singapore continue to lead towards a progressive recovery in the economy. The recent positive development of the COVID-19 vaccine further fuels the optimism and strengthens the conviction that an economic recovery remains underway.
  • We reiterate our view that office demand and office S-REIT share prices correlate positively with the GDP and track the recovery quite closely to GDP recovery as seen in historical trends over the past three recessions (previous report Singapore Office REITs - DBS Research 2020-06-08: Grab It While It Lasts).
  • The recent release of Singapore’s 3Q20 GDP growth figure evidently shows a q-o-q recovery as Singapore emerges from the steepest GDP contraction in 2Q20, in line with our DBS economist’s previous forecast. Although 3Q20 GDP recorded a 5.8% y-o-y contraction led by construction and services (-46.6% y-o-y and -8.4% y-o-y respectively), on a q-o-q basis, 3Q20 GDP recorded a strong rebound of 9.2% q-o-q while construction and services recorded a +34.5% q-o-q and +6.0% q-o-q rebound respectively.
  • Heading into 2021, the economy is on the mend with greater optimism of a recovery now that an approved vaccine is on the horizon. Our DBS economists forecast a +5.5% GDP growth in 2021 and the construction and services sectors to catch up in 2021. While the pace of recovery could be uneven across various services segments, we believe the economy is turning for the better.

Unemployment has peaked in FY20 based on economist forecasts.

  • Despite the fears on unemployment risks post COVID-19, most economists are forecasting the unemployment rate to peak in FY20 and to taper off in FY21. Our DBS economists forecast unemployment rate to peak at 4.8% in 4Q20 and to slowly taper off to 3.5% in 4Q21. Although unemployment fears may continue into 1H21, our DBS economists expect a greater improvement in 2H21.
  • In addition, as the progressive GDP recovery in FY21 would likely be led by services and construction sectors, we expect the financial services and insurance sector (that are the largest tenants in CBD offices) to remain resilient.
  • Once again, the successful rollout of an effective vaccine would be the catalyst to drive businesses to return to normal. Thus, unemployment risks could further dissipate quickly as seen following the SARS outbreak when unemployment fell back to pre-SARS levels within three quarters after WHO announced its containment.


Rising adoption of flexible working arrangements to be mitigated by low new supply and GDP recovery


Firms are increasingly looking to adopt a hybrid working model post COVID-19 pandemic.

  • The rising trend of working-from-anywhere (or flexible working arrangement) is one of the key trends emerging post the COVID-19 pandemic which we believe will significantly impact the office sector. Aided by the advancement in technological and productivity enablers, workers have been able to work efficiently and effectively from their homes through the pandemic.
  • Given the flexibility and popularity of such flexible work arrangements amongst employees, we believe that firms may look to “right-size” their office space and in the process crystallise occupancy savings in the near term. In the recent weeks, companies, especially the banks in Singapore, appear to be taking the lead in these new initiatives to transform the way employees work. Banks that have explicitly announced the adoption of new working methods in various ways include DBS (SGX:D05), UOB (SGX:U11), HSBC and Mizuho which will allow employees to work from their homes for up to two days a week (or between 30- 40% of their time at work).
  • Despite the rising popularity of these hybrid models, the level of adoption varies by sectors and job requirements. In addition to workable hybrid models, firms need to balance the requirements for safe distancing in the work environment and potential downsizing in view of an uncertain economic outlook. We understand that firms are still reviewing their plans and we might see firmer decisions being made in FY21 and the next few years as leases come up for expiry.

Four key factors impacting the net demand for CBD office space – downward trend could be mitigated with expansion.

  • As the situation remains unclear, we identify a few key factors that could impact both positively or negatively on the net demand of CBD office space by the trade sectors of the office tenants –
    1. trade sectors that would most likely adopt flexible work arrangements which may lead to rightsizing the office space,
    2. trade sectors that are impacted by the COVID-19 pandemic and may see a slower recovery compared to other sectors,
    3. trade sectors that are beneficiaries of the pandemic that is leading to their continued expansion, and
    4. the adoption of safe distancing will expand the space per employee.
  • Based on the office tenant mix by trade sectors in CBD, we identified that c.50% comprise tenants in trade sectors (largely banking, financial services and insurance sectors at c.39%) that could lead in the adoption of flexible work arrangements.
  • Meanwhile, c.20% of the tenants are from trade sectors that are likely to be impacted by COVID-19 and are at risk of downsizing due to cost rationalisation, comprising mainly F&B, retail and energy. Lastly, the tech sector is the main beneficiary of the COVID-19 pandemic which has led to its continued growth.

We estimate a base case of c.1.1m sqft of negative net absorption…

  • As c.70% of the tenant mix are in sectors that could be considering rightsizing / downsizing and only 20% of the tenants are in sectors that are still expanding, this appears to further accentuate the overhang concerns looming over the office sector. However, the subsequent two factors mentioned below could mitigate these negatives.
    • Firstly, with safe distancing still in place and could likely remain longer, companies may need to increase office space per employee by c.25% from the current 80 sqft per employee to 100 sqft.
    • Secondly, the rate of expansion, despite being only applicable to a smaller component of the tenant mix, may offset some of the potential return of space from either flexible work arrangements or downsizing.
  • It remains unclear how these various factors could ultimately impact net demand, but we attempt to provide a few scenarios on how these differing factors may change the outlook on the net absorption in the office market.
  • Our assumptions are:
    • Base case:
      • Unemployment – 2% reduction in number of employees.
      • Work-from-anywhere (WFA) - 70% of the office tenants (i.e. financial services, retail, F&B, energy, etc.) allow 30% of their workforce to work outside the office.
      • Safe distancing – increase the office space per employee from the current c.80 sqft to 100 sqft to ensure safe distancing requirements are met.
      • Expansion – 3% expansion in workforce which also implies 15% growth in 20% of the office tenants (i.e. tech sectors).
    • Bear case:
      • Unemployment – 2% reduction in number of employees.
      • Work-from-anywhere (WFA) - 100% of the office tenants allow 30% of their workforce to work outside the office.
      • Safe distancing – increase the office space per employee from the current c.80 sqft to 100 sqft to ensure safe distancing requirements are met.
      • Expansion – 1.5% expansion in workforce which implies 7.5% growth in 20% of the office tenants (i.e. tech sectors).
    • Bull case:
      • Unemployment – 2% reduction in number of employees.
      • Work-from-anywhere (WFA) - 100% of the office tenants allow 15% of their workforce to work outside the office.
      • Safe distancing – increase the office space per employee from the current c.80 sqft to 100 sqft to ensure safe distancing requirements are met.
      • Expansion – 6% expansion in workforce which also implies 30% growth in 20% of the office tenants (i.e. tech sectors).
  • Based on our base-case scenario, we guesstimate that there could be a net negative absorption of c.1.1m sqft of office space which may emerge as either shadow space or vacancy within a year or the next few years. This could lead to a rise in vacancy rate in the central offices to 13.8% from the current 12%, which is also the historical average.
  • As a comparison, the 1.1m sqft of office space is close to the average net supply per annum of CBD office space in the past five years (2015-2019).

…could be mitigated with a 0.9-ppt higher expansion.

  • If the base case were to materialise, 1.1m sqft of shadow space or vacancy may cause a supply glut in the market and thus, keep the pressure on rental rates. However, we estimate that with a 0.9-ppt higher expansion (3.9% vs 3% in the base-case assumption), the net demand will be at breakeven.

Is the estimated expansion possible?

  • During the GFC, employment in Singapore continued to grow y-o-y, though growth tapered off to a low of 1.3% in 2019. When the economy recovered from GFC, total employment and estimated employment in CBD grew 3.9% y-o-y and 7% y-o-y respectively in 2010.
  • As we head into a recovery mode in FY21 coming out of the pandemic, likewise, we believe the recovery in business sentiment will lead the recovery in employment, in line with economists’ consensus forecasts.

Limited net supply of only 167k sqft from 2020-2022 could mitigate some impact from these headwinds and prevent a steep decline in rental rates.

  • Given the limited net supply of 167k sqft from 2020F-2022F, we reiterate our view that this could mitigate some of the impact from the headwinds listed above and prevent a steep decline in rental rates.
  • If recovery were to be faster than expected in view that an effective vaccine could be available soon, and adoption of flexible work arrangement is lower than expected, the bull case of recording a positive net absorption of 5m sqft could be realised and could spur the office market instead of hindering its growth.


Office S-REITs, being laggards, offer opportunity to be positioned for recovery.


Office S-REITs’ share price performance has been lagging peers’ in other sectors.

  • As we slowly emerge out of the COVID-19 pandemic, bringing sentiment towards a more positive territory and now to having an effective vaccine in sight, the S-REITs’ share prices have recovered from their March 2020 lows. However, office S-REITs share price performance has been lagging that of peers from the other asset classes. The S-REIT sector’s share price has recovered c.40% from its March 2020 low, mostly led by the industrial and hospitality sectors, whose share prices have increase by c.60% since March 2020.
  • The office and retail sectors have underperformed the S-REIT sector, recovering only c.30% from the March 2020 low. In the last few days, the office sector has marginally underperformed the retail sector.
  • As we progressively head into a recovery mode in FY21, we believe office S-REITs, currently still laggards, offer the opportunity to be positioned to ride the recovery from the pandemic.

Top office S-REITs picks are CICT, KREIT and MCT for the quality of their portfolio.

  • We continue to see attractive risk/reward ratios at an average of 0.9x P/NAV for the office S-REITs, equivalent to the historical average. We believe the sector remains attractive as recovery is underway. With the vaccine now within sight, we believe a return to normalcy would be the catalyst to drive office S-REITs’ share prices towards 1.1x P/NAV, at 1SD above historical average.
  • Our top office S-REIT picks are CapitaLand Integrated Commercial Trust (SGX:C38U), Keppel REIT (SGX:K71U) and Mapletree Commercial Trust (SGX:N2IU) with target prices of S$2.50, S$1.40 and S$2.25 respectively, for the quality of their portfolio, attractive valuations and pure plays by asset class and geography for Keppel REIT and Mapletree Commercial Trust respectively. CapitaLand Integrated Commercial Trust has emerged as the largest S-REIT and offers an attractive yield of c.6%, higher than its large-cap peers.
  • We maintain our BUY rating on Suntec REIT (SGX:T82U) but raised our target price to S$1.85 (from S$1.81 previously), incorporating the latest acquisition of Nova Properties in London.
  • We maintain our BUY rating and target price of S$0.50 for OUE Commercial REIT (SGX:TS0U).

Key risks.

  • Factors that could derail our thesis include
    • slower-than-expected rebound in the economy,
    • slower-than-expected rollout of an effective vaccine, and
    • greater-than-expected adoption of flexible work arrangements.
  • See PDF report attached below for complete analysis on Singapore Office REITs.


DBS' research reports on Singapore office REITs:


More reports on S-REITs by sector:



See also:






Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-12-10
SGX Stock Analyst Report BUY MAINTAIN BUY 2.500 SAME 2.500
BUY MAINTAIN BUY 1.400 SAME 1.400
BUY MAINTAIN BUY 2.250 SAME 2.250
BUY MAINTAIN BUY 0.500 SAME 0.500
BUY MAINTAIN BUY 1.850 UP 1.810


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