As the Punggol Digital District (PDD) takes shape, it could have both positive and less favourable impacts on some listed entities. JTC says that once completed, PDD will offer a total gross floor area (GFA) of 307,950 sqm. According to JTC, 65% of the 175,000 sqm of business park and office space has been pre-committed.
CapitaLand Ascendas REIT (CLAR) is the second-largest S-REIT by assets and market capitalisation. It owns properties across three key segments: business space and life sciences, logistics and industrial, and data centres. It invests in developed markets anchored in Singapore.
Is PDD likely to put pressure on occupancies and rents in other parts of Singapore? JTC, which oversees the use of industrial and business park land in the country, also acts as both a developer and a manager. Market observers note that the organisation is acutely aware of the supply and demand dynamics within the business park sector.
Undoubtedly, PDD is pressuring rents and occupancy. According to the JTC Quarterly Market Report 3Q2024, the average occupancy for business parks of 78.8% is marginally higher q-o-q and above the 78% recorded in 1Q2024, but it is lower y-o-y compared to the occupancy of 80.5% in 3Q2023.
“Suburban business parks may see modest or flattish growth in rents given a slowdown in demand and higher new supply with ample business park stock coming onstream in 2024 and 2025, which will continue to pressure business park rents,” says Wong Xian Yang, head of research, Singapore and Southeast Asia, Cushman & Wakefield. He adds that a large part of this supply is from PDD.
The business park segment continued to come under pressure as rents dipped by 0.2% q-o-q in 3Q2024, a slight acceleration from the 0.1% q-o-q decline in 2Q2024. While JTC’s vacancy rate showed some improvement, falling from 21.7% in 2Q2024 to 21.2% in 3Q2024, it remains high compared to historical levels and they do not include PDD.
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“PDD will affect the business park space, and the impact is already being felt across business park spaces, but I think the impact is approaching its tail end as 65% is already committed,” says Vijay Natarajan, vice-president of real estate and REITs, RHB, in a recent report.
Different business parks have different offerings, says Tricia Song, head of research, CBRE, Southeast Asia. “It is important to note that PDD has not completely cannibalised demand. Each business park has its own strategic positioning and appeal to specific industries. For example, PDD may attract tech companies and digital businesses seeking modern, well-equipped spaces, while One-North and Science Park may continue to appeal to industries such as biomedical sciences, infocomm technology, and media and entertainment,” she says.
Science Park gross effective rents can range between $4 to $7.50 psf per month (pm); for Changi Business Park (CBP), the range is about $2.80–$5 psf pm; and for PDD, rents are estimated at more than $5 psf pm, Wong says.
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Analysts remain positive on CLAR
One of the largest landlords in CPB is CLAR, which owns seven properties there valued at $1,336.9 million as of Dec 31, 2023. Its largest property in CBP is One@Changi City, which contributes 2.5% of CLAR’s gross rental income (GRI). Singapore accounts for 64% of CLAR’s asset value of $16.9 billion.
“Julius Baer has relocated its finance, audit and human resource functions to One@Changi City and will occupy 75,000 sq ft across two levels. Singapore Airlines C6L will also be relocating its corporate hub to One@Changi City. Occupancy for CLAR’s properties at Changi Business Park should improve over the next 12 months,” says Jonathan Koh, the banking and REITs analyst at UOB Kay Hian (UOBKH) Research.
CLAR is also one of the largest landlords of business and science parks in Singapore. The REIT owns six business park properties in Science Parks 1 and 2 and seven life science properties in the same areas. Based on data from its 2023 annual report, CLAR holds more than 979,000 sqm of gross floor area (GFA) in business parks and life science properties.
In 3Q2024, the occupancy of CLAR’s business and science park properties was 83.5%, higher than the average 78.8% occupancy cited by JTC for Singapore in its latest quarterly report. CLAR’s average occupancy rate in 3Q2024 was 92.1%.
Although business space accounts for 37% of CLAR’s portfolio (and life sciences 8%) by asset value, no property contributes more than 4.2% to GRI. Galaxis in one-north is the largest contributor, followed by 12, 14 and 16 Science Park Drive.
JP Morgan says CLAR had positive surprises in its 3QFY2024 business update. “Strong 3Q2024 rental reversion of +14.4% was led by an uplift in Singapore (+12.2%), the US business space (+22.9%) as well as the Australia business space (+9.5%) and logistics (+52.3%). Singapore experienced an improvement in rental reversions (+12.2% versus 11.9% in 2Q2024 and +9.8% in 3Q2023) due to a +31.7% bounce in logistics and a+9.6% uplift in its industrial and data centre portfolio. Singapore business parks were softer at +0.7%.”
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“Rent reversion was mid-teen positive for 1HFY2024 and, consequently, rent reversion guidance has been raised to high-single-digit from mid-single-digit for the full year,” says Krishna Guha, an analyst at Maybank.
Although its assets in places like CBP, Science Park and one-north are older than those of PDD, CLAR constantly upgrades its portfolio with asset enhancement initiatives (AEIs) and capital recycling. “Proactive portfolio reconstitution has strengthened its balance sheet. We expect management to endeavour to recycle capital into higher-yielding and newer assets. While we expect frictional occupancies in the US and Singapore business parks, diversified revenue profile and strong credit should stabilise the bottom line,” Guha adds in his report.
For instance, CLAR is a joint-venture partner with CapitaLand Development in the redevelopment of 1 Science Park into Geneo, in which CLAR has a 34% stake. Geneo will comprise three properties with five state-of-the-art sustainable buildings across about 180,600 sqm of GFA adjacent to Kent Ridge MRT Station.
“Another near-term opportunity to unlock value in its Singapore data centre (DC) assets could arise from its top tenant, Singapore Telecommunications Z74 , likely vacating its space upon lease expiry in the coming years,” says Natarajan. He adds that the divestment of 21 Jalan Buroh at a premium of 67% above book value underscores the potential hidden value in some of CLAR’s assets. Its other industrial assets in Tai Seng and the Ubi cluster may offer such redevelopment uplifts and opportunities in the future, including the potential to redevelop its other Singapore DC assets such as Telepark, Kim Chuan Telecommunications Complex (KCTC) and 38A Kim Chuan Road.
JP Morgan is overweight on CLAR, while Maybank, RHB and UOBKH all recommend buying the REIT.
Frasers Centrepoint Trust a beneficiary
While the new retail space at PDD may draw some shoppers away from Waterway Point, overall, PDD is likely to be a net positive for Frasers Centrepoint Trust J69U (FCT).
According to FCT’s retail outlook, 216,900 sq ft of retail space from PDD is expected to come onstream this year. This compares to Waterway Point, which has a net lettable area (NLA) of 389,444 sq ft. CBRE calculates that suburban prime retail rents rose 0.5% q-o-q and 2.1% y-o-y to $32.10 psf pm.
“Punggol is a very sizeable residential district, and the development of PDD definitely benefits retail consumption. Waterway Point is well-positioned as the largest mall there and it is also the connection hub to MRT and LRT,” says a spokesman for FCT’s manager.
In 2020, FCT expanded its portfolio by completing the acquisition of PGIM Asia Retail Fund (ARF), which gave it five suburban retail malls and an office property. FCT also owns 50% of Waterway Point and 50% of NEX, which it partly acquired earlier this year.
As a result, although Waterway Point is significantly larger than the new retail space at PDD, FCT owns 50%, and any cannibalisation that materialises in the first few weeks or months of the PDD retail opening is likely to have a limited impact on FCT.
With that, alongside the acquisition of a 50% stake in NEX earlier this year, FCT now owns or holds stakes in 10 suburban retail properties and one office asset, valued at $7.6 billion with an NLA of 2.5 million sq ft as of the end of September. These assets are strategically located near or next to MRT stations or bus interchanges.
During a results briefing on Oct 28, Richard Ng, CEO of FCT’s manager, was keen to emphasise that the new linkages to Johor — such as the Rapid Transit System (RTS), which analysts are more concerned about than PDD — are unlikely to pose a significant threat, despite expectations that it will be operational by the end of 2026.
“From an overall perspective, 7.7% rental reversion growth was pretty strong. We will continue to work very hard in the next cycle of renewals and get the same level of reversions. This FY2024 figure is coming off a significant base with 42% of our malls’ NLA and 88 leases from various trades. For Causeway Point, there is a lot of focus on refreshing the trade mix and introducing new offerings. There is a very strong conviction in the Woodlands catchment area,” says Ng.
Causeway Point is FCT’s largest mall and accounts for 27% of the REIT’s gross revenue compared with 11.8% for 50% of Waterway Point. “We are positive on the strong 7.7% reversions with tenant sales still up 1% y-o-y and with 16% occupancy costs below pre-Covid-19 levels, we believe reversions can be sustained,” adds JP Morgan.
FCT’s manager regularly undertakes AEIs in its malls. It has completed the AEI of Tampines 1 and will embark on AEI for Hougang Mall for $51 million with a target ROI of 7%. Both Tampines 1 and Hougang Mall were acquired from the PGIM ARF portfolio.
‘Strong interest’
In August, Warburg Pincus and Lendlease announced a joint venture in which the duo, together with the joint venture’s managed investment vehicle Lino, acquired a $1.6 billion portfolio of assets in Singapore from entities associated with Blackstone and Lim Chap Huat, executive chairman of Soilbuild Group Holdings. The properties are focused on life sciences and R&D.
The Soilbuild-Blackstone portfolio, which previously formed the Singapore assets of Soilbuild Business Space REIT, comprises business parks and specialist facilities tenanted to blue-chip companies across life sciences, technology, advanced manufacturing and logistics.
Although both the business park and office property sectors are vulnerable to oversupply pressures, Singapore continues to be an attractive market for both private and public investors thanks to large completions like PDD and Grade A developments such as IOI Central Boulevard Towers. The placement and preferential offer of CapitaLand Integrated Commercial Trust C38U (CICT) units in the equity fundraising for the acquisition of a 50% stake in Ion Orchard were both oversubscribed.
“Retail malls have seen strong interest given the higher net yields compared to offices and rising rents,” says Cushman & Wakefield. “Total investments into Singapore properties rose by 56.6% y-o-y to $10.4 billion in 1H2024 compared to $6.6 billion in 1H2023.” However, Wong says in his report that office assets could see a mild repricing “as net yields remain below borrowing costs”.
Despite the emergence of PDD, Singapore’s assets remain attractive, and analysts suggest that the best way to capitalise on this opportunity is through REITs such as CLAR, FCT and CICT.
