SINGAPORE (June 3): UOB KayHian is maintaining the Singapore office REIT sector at “overweight” given the sector in its second year of recovery after the market bottomed in 1H17.
UOB says continued upside for office rents is supported by tapering supply which has eased to 1.3 million sf this year, of which only 228,958 sf is within the core CBD.
Occupancy for Grade A office space in the core CBD saw a v-shaped recovery from the trough of 91.6% in 3Q17 after the completion of Marina One East and West Towers with 1.9 million sf of office space. Since then, occupancy has recovered to a healthy 95.2% in 1Q19.
Grade A office rents for core CBD surged 14.9% to $10.80 psf pm in 2018, after a slight 3.3% rise in 2017. Grade A office rents further rose 3.2% q-o-q to $11.15 psf pm in 1Q19. Still, office occupancy costs remain affordable compared to other global cities
Absorption of office space also remains positive and is driven by modern services, technology companies, including startups and fintechs and co-working operators.
Leasing interest for upcoming new developments is also fairly healthy.
“Maintain overweight. Our top-pick is CapitaLand Commercial Trust, followed by Keppel REIT,” says lead analyst Jonathan Koh in a May 30 report.
CCT is the largest landlord in Singapore’s CBD with Grade-A office buildings accounting for 81% of its portfolio NLA.
Locally, its 51-storey CapitaSpring -- the former Golden Shoe Car Park -- with 635,000sf of office space, 12,000sf of retail space and food centre of 44,000sf is scheduled for 1H21 completion.
JPMorgan has committed to 155,000sf or 24% of NLA at CapitaSpring.
Koh says supply of new office space is manageable at only 899,781sf in 2021, which poses minimal competition for CapitaSpring.
Overseas, CCT has completed the acquisition of freehold office building, Gallileo, in Frankfurt for €356 million ($547 million) or a NPI yield of 4.0% in Jun 18.
Management plans to increase depth in selected gateway cities in Germany but cap exposures to overseas markets at 20% of deposited properties.
UOB has a $2.16 target price for CCT.
As at end March, KREIT’s WALE for its Singapore properties is at 4.5 years, which is one of the longest among Singapore REITs. WALE would be longer at 8.3 years if 311 Spencer Street in Melbourne was included. Its top-10 tenants’ WALE was at 8.0 years.
When completed, 311 Spencer Street will provide recurrent income stream with fixed annual rental escalations and an NPI yield of 6.4%.
KREIT has announced the proposed acquisition of T Tower in Seoul at an agreed $301.4 million. T Tower provides an NPI yield of 4.7% and is expected to boost pro-forma 2018 DPU by 2.5% to 5.70 cents.
UOB has a $1.37 target price for KREIT.
As at 10am, units of CCT are up 2 cents at $1.95 while units in KREIT are up 1 cent at $1.21.
At these levels, CCT and KREIT have 2020F yields of 4.7% and 4.9%.
