Singapore Office REITs - DBS Research 2021-04-30: Darkest Before Dawn

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KEPPEL REIT (SGX:K71U) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) SUNTEC REAL ESTATE INV TRUST (SGX:T82U) OUE COMMERCIAL REIT (SGX:TS0U)

Singapore Office REITs - Darkest Before Dawn

• Most of the negative news on major occupiers space rationalization is out, in our view.
• Downsizing by major banks is less than projected; ~30% to 40% of space has been backfilled.
• Progressive return-to-office and economic recovery to offset vacancy risks.
• Maintain positive stance on Singapore office sector.

“Bad news” is good news to us.

• Standard Chartered Bank (SCB) is weighing options to reduce 19-50% of its Singapore office space at Marina Bay Financial Tower 1 (MBFC1), according to Bloomberg. Bloomberg reported that Standard Chartered Bank is weighing options to downsize its Singapore office space by a minimum of 4 floors (c.80k sqft) out of a total of 21 floors and up to 50% of its space. This works out to be a minimum of ~19-50% of its total leased area of ~420k sqft at MBFC1.
• According to the article, Standard Chartered only needs to retain four floors (19%) to keep its logo on the building’s façade.
• This news will present one of the last few major banks to release its downsizing plans.

Potential impact on Keppel REIT / Suntec REIT is up to ~4%, likely in FY22.

• We believe this is one of the bigger office space downsizing moves among the banks and would likely impact both Keppel REIT (SGX:K71U) and Suntec REIT (SGX:T82U) who each have a 33.3% stake in the office building. This is probably one of the larger downsizing initiatives that was of concern to Keppel REIT.
• To put this news into perspective, Standard Chartered Bank’s total lease area is ~10% of Keppel REIT’s attributable NLA and Suntec REIT’s office NLA.
  • We understand that Standard Chartered Bank’s lease is likely expiring in FY22 and according to Keppel REIT, leases of banking institutions that are expiring in FY22 comprises only 2% to 4% of its NLA.
  • We estimate that Standard Chartered Bank’s total leased area contributes some ~8% of Suntec REIT’s income.

Stay the course – progressive economic recovery and return-to-office to offset potential vacancy risks.

• While this news may raise some near-term concerns on the office sector and specifically Keppel REIT and Suntec REIT, we believe the quantum of downsizing in the perspective of Keppel REIT’s and Suntec REIT’s portfolios are still manageable. Both these office REITs have contributions from recently completed and acquired assets, and capital distributions to support DPU growth.
• In addition, the lease expiries in FY22 does provide office landlords some time to backfill the space given that market is recovering and new upcoming supply (such as CapitaSpring) are mostly committed, mitigating the downtime from vacancy risks.

Most ‘negatives’ from financial institutions’ downsizing plans are known; returned space seems manageable.

• Standard Chartered Bank is one of the last few banks with a significant footprint within the CBD and this news probably means that most of the “negatives” of financial institutions downsizing are likely to be out. Based on our knowledge of downsizing among major banking institutions (see table in report attached below), the total gross returned space is estimated to be 350k sqft to 480k sqft, which is below our estimated net returned space of 1m sqft. This should be absorbed by the market eventually.
• Two of the major banks that have yet to disclose their office plans are
  • Bank of America Merrill Lynch (BAML) at OUE Bayfront (OUE Commercial REIT) and Bank of America Merrill Lynch HarbourFront (MLHF by Mapletree Commercial Trust), and
  • Deutsche Bank at One Raffles Quay (ORQ by Keppel REIT/ Suntec REIT) and MBC1 (Mapletree Commercial Trust).

Maintain our positive stance on Singapore office sector.

• We maintain our positive stance on the office sector as a proxy to recovery and reopening of the economy. We believe corporates and institutions will start to review expansion plans as the economy recovers and hiring begins again (unemployment rate appears to have peaked in 4Q20 and has declined in 1Q21).
• The office S-REITs (Keppel REIT, Mapletree Commercial Trust, Suntec REIT and OUE Commercial REIT) will continue to benefit from the return-to-office trend. Keppel REIT’s and Mapletree Commercial Trust’s best-in-class portfolios will likely emerge strong post pandemic.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400

BUY MAINTAIN BUY 2.250 SAME 2.250

BUY MAINTAIN BUY 1.850 SAME 1.850

BUY MAINTAIN BUY 0.500 SAME 0.500