Singapore REITs - UOB Kay Hian 2021-04-15: WFO Vs WFH – Maintaining Competitiveness Vs Offering Flexibility

Singapore REITs - UOB Kay Hian Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) KEPPEL REIT (SGX:K71U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Singapore REITs - WFO Vs WFH ~ Maintaining Competitiveness Vs Offering Flexibility




WHAT’S NEW

  • The advantages of Working From Home (WFH) are well understood and publicised, namely cost savings from paying less rents and enhancing employee welfare. However, the flaws of WFH are often ignored and swept under the carpet.

WFH has long-term negative side effects:

  • WFH puts inordinately more strain on managers, especially for large companies. A study conducted by Andrew Kun, Raffaella Sadun, Orit Shaer and Thomaz Teodorovicz and published by Harvard Business Review found that the work day for managers lengthened by 56 mins on average. The time spent on replying to emails increased by 13 mins. Meetings and work-related calls increased by 12%. Unfortunately, work-related lunches and leisure activities declined by 8%. There is no change in the length of the work day for rank & file employees (non-managerial). Conversely, their personal time increased by 60 mins due to time saved from commuting.
  • Negative impact on competitiveness and innovation. Face-to-face interactions are essential for maintaining competitiveness through collaboration and innovation. WFH could cause a slump in innovation and new products. Companies risk eroding their competitive advantages over time with WFH.
  • WFH erodes corporate culture in the long run. Working From Office (WFO) instils desirable culture and values. It facilitates organisational and on-the-job learning.
  • Employees find it difficult to stay motivated over the long term. Productivity drops after the initial honeymoon period.
  • Employees feel fatigued, lonely, isolated and depressed. Some employees burn out as they struggle with a heavy workload and are unable to switch off at home. It is difficult to separate work from personal life and achieve work-life balance.
  • WFH is most challenging for parents with young children.

Various factors mitigate the negative impact of WFH.

  • Demand for office space is strengthened by:
    1. De-densification of office layout to safeguard employee health and workplace hygiene.
    2. CBD Incentive Scheme offers an increase in gross plot ratio of 25-35% to encourage conversion of older office buildings ( > 20 years old) into mixed-use developments (commercial & residential) or hotels. The scheme is applicable to Anson Road, Cecil Street, Robinson Road, Shenton Way and Tanjong Pagar areas. According to Colliers, 20 office buildings with 5m sf of office space (16% of total core CBD stock) in the Shenton Way / Tanjong Pagar precint that could qualify for the CBD Incentive Scheme. The scheme could reduce the stock of office space within core CBD.
    3. Technology companies taking up more office space. American and Chinese technology companies are expanding their regional hubs in Singapore.
    4. The government has eased workplace safe management measures by allowing a maximum of 75% of employees (previous limit: 50%) at the workplace at any point in time from 5 Apr 21. Vaccination for COVID-19 is expected to be completed by 3Q21, which paves the way for more employees to return to their offices.

The ideal mix between WFO and WFH.

  • According to a survey conducted by the Atlanta FED and the University of Chicago, the number of work days spent on WFH was 5% before the COVID-19 pandemic, jumped eight-fold to 40% during the pandemic and should drop to 20% after the pandemic.
  • According to Brookfield Research, average office space per employee could increase from 150sf to 200sf over the next five years to address concerns regarding employee health and workplace hygiene. Thus, the overall impact could be an increase in demand for office space of 12%.


ACTION


Gradual recovery commences in 2H21 after stabilisation in 1H21.

  • Grade A Office rents for core CBD corrected 9.6% y-o-y but were flat q-o-q at S$10.40psf pm in 1Q20. The office market has recovered to positive net absorption of 130,000sf in 1Q21 after three consecutive quarters of negative net absorption. We have a two-tier office market:
    • vacancy for Grade A office space in Core CBD has tightened by 0.6ppt q-o-q to 3.3% in 1Q21 due to flight to quality, and
    • vacancy for Grade B office space island-wide was stable at 7.4% in 1Q21.
  • Leasing demand is coming from technology and financial services, such as asset management and family offices. Displaced tenants from buildings scheduled for redevelopment, such as AXA Tower and Fuji Xerox Towers, are looking for office space.

CapitaLand Integrated Commercial Trust (SGX:C38U) (BUY/ Target Price: S$2.42):


Keppel REIT (SGX:K71U) (BUY/ Target Price: S$1.49):


Suntec REIT (SGX:T82U) (BUY/ Target Price: S$1.72):


Decentralised / suburban offices, such as Business Parks and Hi-tech Buildings:


Ascendas REIT (SGX:A17U) (BUY/ Target Price: S$3.82):


Mapletree Commercial Trust (SGX:N2IU) (BUY/ Target Price: S$2.35):


Mapletree Industrial Trust (SGX:ME8U) (BUY/ Target Price: S$3.50):


SECTOR CATALYSTS

  • Re-opening of the economy and easing of safe distancing measures.
  • Gradual recovery and turnaround in the office market boosted by economic recovery and limited supply.


ASSUMPTION CHANGES

  • We maintain our existing earnings forecast.


RISKS

  • Spike in 10Y Singapore government bond yield to above 2%.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-15
SGX Stock Analyst Report BUY MAINTAIN BUY 3.820 SAME 3.820
BUY MAINTAIN BUY 2.350 SAME 2.350
BUY MAINTAIN BUY 3.450 SAME 3.450
BUY MAINTAIN BUY 1.490 SAME 1.490
BUY MAINTAIN BUY 1.720 SAME 1.720



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