Changi Business Park (CBP) and International Business Park (IBP) may be “hollowing out” with “sub-par” occupancy rates as companies downsize, but UOB Kay Hian Research analyst Jonathan Koh is undeterred, maintaining “overweight” on Singapore REITs (S-REITs) with a few select picks.
The work-from-home (WFH) arrangement has “cast a dark shadow” over business parks, says Koh in a June 25 note. “Business park properties, being pseudo-offices, have been the most disrupted by WFH and hybrid work arrangements.”
Tenants are consolidating to optimise their usage of office space to generate cost savings and shadow space has increased, primarily from the technology and financial services sectors, he adds.
On a nationwide basis, occupancy for business parks has languished, falling 8.0 percentage point (ppt) to 79.1% over the past three years.
Companies in the financial services and technology sectors are offshoring IT to India, says Koh.
DBS set up its offshore tech hub in Hyderabad, India in 2016, and has been increasing the hiring of developers and engineers in India. Standard Chartered Bank is moving 16,000 employees to its new integrated campus in Chennai, India from 2023 to 2025. UBS has recently increased senior leadership positions to make India a core technology hub. It has business solution centres in Pune, Hyderabad and Mumbai.
See also: Struggling Changi Business Park deals blow to Singapore's regional hub ambitions
Singapore has also tightened its criteria for employment passes. The government raised the minimum qualifying salary for employment passes by $500 to $5,000 in 2022. The minimum qualifying salary will increase again to $5,600 in 2025.
The higher cost to hire expatriate software engineers has contributed to the increased offshoring, says Koh.
Some business parks better than others
Koh also notes a bifurcation for the performance of business parks. Occupancies for one-north and Queenstown (including Science Park 1 & 2) were healthy at 91.0% and 85.5% respectively.
“One-north is an innovation hub and targets research facilities of multinational companies. It has a large cluster of biomedical, e-commerce and media companies. Science Park 1 & 2 benefit from their proximity to the National University of Singapore and the National University Hospital,” he writes.
Meanwhile, IBP and CBP are “hollowing out”, he adds. IBP has the lowest occupancy of 61%, followed by 70% for the Eastern Suburbs, including CBP. “IBP suffers from poor transportation connectivity and a lack of amenities. Standard Chartered Bank, UBS and IBM have downsized their footprint at CBP.”
That said, IBP will benefit from the upcoming Jurong Regional Line. The upcoming Jurong Town Hall MRT station will improve transportation connectivity at IBP, says Koh. The 24km-long Jurong Region Line, the seventh MRT line in Singapore, has 24 stations and will commence operations in three phases from 2027 to 2029. Jurong Town Hall MRT station will be ready when phase two is scheduled for completion in 2028.
Plenty of competition is on the horizon, from supply coming onstream. According to CBRE, the average new supply over 2024-2027 amounts to 0.79 million sq ft per year, which is 16% higher than the five-year historical average of 0.68 million sq ft per year during 2019-2023.
According to Koh, more competition will come from the Punggol Digital District (PDD), a new business park in north-eastern Singapore, which will house a new campus for the Singapore Institute of Technology.
It focuses on key growth sectors of the digital economy, such as cyber security, artificial intelligence and robotics. PDD has eight business park towers with NLA of 1,951,700 sq ft, which will be completed in phases starting 4Q2024. According to CBRE, PDD is 67% pre-committed as of 1Q2024.
Another upcoming business park is Geneo at Science Park 1, a life science and innovation campus with three Grade A business park towers with column-free floor plates of more than 32,000 sq ft and an event plaza.
The development has a total GFA of 1.3 million sq ft, of which 71% is purpose-built for life sciences and biomedical research. The three towers share an interconnected basement with sheltered connectivity to the Kent Ridge MRT station. Geneo is expected to be completed in 2Q2025.
Rents under pressure
Rents for business park space in the city fringe were resilient and unchanged for seven consecutive quarters at $6.10 psf in 1Q2024. Rents for the rest of the island were also stable at $3.70 psf.
Landlords for some older buildings with higher vacancies have begun to reduce rents to retain existing tenants and attract new tenants, says Koh. “Some tenants are consolidating to cut costs, while others are downsizing due to change in workplace strategy.”
CBRE expects new supply and shadow space to exert downward pressure on rents and occupancy.
Rent for hi-tech spaces, meanwhile, was unchanged at $3.55 psf in 1Q2024. Most tenants renewed their leases for hi-tech spaces to avoid relocation costs, says Koh. “The market is still digesting several hi-tech projects completed in 2023, such as HarbourLink InnoHub (602,000 sq ft), Solaris @ Tai Seng (906,300 sq ft) and Mapletree Hi-Tech Park @ Kallang Way (732,371 sq ft).”
According to CBRE, the average new supply over 2024 to 2027 is minuscule at 0.05 million sq ft per year, which is 91% lower than the 10-year historical average of 0.58 million sq ft per year during 2014-2023.
Stock picks
Among the S-REITs, Koh’s top pick is Mapletree Industrial Trust ME8U (MINT), with a target price of $2.93, due to high occupancy at 98.5% for its flatted factories.
MINT has three business park properties at IBP (The Strategy and The Synergy) and CBP (The Signature) valued at $533 million on aggregate as of March, which accounted for 6.1% of portfolio valuation.
Occupancy for its business park properties is in line with the broader market at 80.9%, notes Koh, and management has said it will explore opportunities to divest its business park properties.
MINT has eight hi-tech buildings in Singapore, which accounted for 17.1% of portfolio valuation. Occupancy for its hi-tech buildings is healthy at 88.6%.
Koh’s other top pick is CapitaLand Ascendas REIT A17U (CLAR), with a $3.62 target price. CLAR has the largest exposure to business park properties in Singapore, at 21.4% of portfolio valuation.
CLAR has five properties in IBP and seven properties in CBP, which are valued at $413 million and $1.34 billion respectively, and accounted for 10.3% of portfolio valuation.
The properties at IBP have low occupancy at 57.4% as of December 2023, while the properties at CBP also have below-par occupancy of 76.1%.
Management is in advanced negotiations with several prospective tenants to backfill vacant space at CBP and IBP, some of which could be concluded in 2H2024, says Koh.
Overall, CLAR has 29 business park properties and 42 hi-tech buildings in Singapore valued at $4.08 billion and $3.34 billion respectively as of December 2023. These properties and hi-tech buildings accounted for 43.8% of the REIT’s portfolio valuation.
The business park properties have lower occupancy at 82.6% as of December 2023, while the hi-tech buildings have a healthy occupancy of 94.6%, says Koh.
As at 12.30pm, units in MINT are trading 2 cents lower, or 0.93% down, at $2.13; and units in CLAR are trading 1 cent lower, or 0.39% down, at $2.56.
