SINGAPORE (June 8): While the office sector has been the least impacted by Covid-19 so far, DBS analysts Rachel Tan and Derek Tan are “cautious” on the potential economic impact it might have on office demand as Singapore gradually reopens its economy.
In a Monday report, both analysts note that there is a historical co-relation between office demand, and GDP across the past three recessions caused by economic crises in Singapore. Hence, they believe that the current economic recession in 2020 will coincide with the bottom in both office demand and office S-REIT share prices.
Forecasting a bottoming in the current Covid-19 recession in 2Q20, both analysts expect office net demand to start declining in 2Q20, in tandem with the GDP.
“Our DBS economist forecasts FY20F GDP to decline by 5.7% yo-y before recovering to 3.5% y-o-y growth in FY21F. Headline GDP growth figure will contract the most in 2Q20 by 8% y-o-y but GDP (in value) will likely bottom out in 3Q20.” they say.
“Post 2Q20, we believe office net demand can start to recover when GDP bottoms and drive the re-rating of office REITs,” they add.
While economic recovery is said to be gradual for 2H20, the analysts see downside risks mitigated by the lower supply of developments till 2022 due to projected construction delays from 2020 to 2022.
“We believe the low levels of net incoming supply, coupled with record low vacancies (less than 5% in the downtown core), will mitigate a steeper fall in office fundamentals and set the stage for a faster recovery into 2021 and beyond when the economy recovers,” say the analysts.
“These two factors, in our view, would set this economic crisis apart from previous economic crises. We believe that this current downcycle will likely be shorter and less steep leading to a quicker recovery in office sector post-COVID-19,” they add.
While the future of workspaces is uncertain due to the adoption of work-from-home (WFH) practices during the circuit breaker measures from April to June, the analysts don’t see a full pivot towards WFH.
“We believe it is too early to turn cautious on potential structural demand shifts with the adoption of WFH practices”, they say.
“In fact, we see Office S-REITs upping the game by offering flexible workspace[s] to meet their tenants’ evolving needs and integrating with sustainability practices,” they add.
The way Rachel and Derek see it, while they may be a little “early” in their call, they see attractive risk/reward ratios for the sector which is trading at 0.8x P/NAV, below its historical mean.
“We believe the sector remains attractive to ride on potential recovery post-COVID-19 and any potential share price weakness upon the release of GDP data would be a good entry opportunity,” they say.
The brokerage’s top picks for the sector are Keppel REIT and Mapletree Commercial Trust (MCT). Both analysts have upgraded CapitaLand Commercial Trust (CCT) to “buy” from “hold”, led by the repricing of their target price for CapitaLand Mall Trust (CMT).
See also: CCT upgraded on potential merger with CMT
As at 1.01pm, units in Keppel REIT are changing hands 0.9% up at $1.17. Units in Mapletree, on the other hand, are changing hands at 1.4% up at $2.15. Units in CapitaLand Commercial Trust are changing hands 2.2% up at $1.86.
