Singapore's Grade A office fears unfounded

Singapore skyline

SINGAPORE (Sept 7): Healthy interest for new office buildings is allaying fears over Grade A office rents crashing and that new office supply will not be absorbed, according to a Monday sector note by DBS Vickers.

Analyst Mervin Song notes that media reports about Guoco Tower in Tanjong Pagar reaching pre-commitment levels of 70% as well as Marina One hitting 35% pre-commitment levels indicate the market is bottoming out.

Singapore office REITs have so far been successful at preventing their tenants from being lured away by the upcoming office supply, Song notes.

“We believe this is a function of the proactive renewal strategy by various office REIT managers as well as REITs typically owning newer or better specified buildings,” says Song.

The new office land auction at a prime site at Central Boulevard in Marina Bay could also spark off a revival of the office market, Song notes, as there is no new supply after 2018 with the exception of this site.

The current “flight to quality” for tenants to newer office buildings also implies the downward pressure on office rents is easing and may be close to a bottom.

Song believes that office REITs are currently trading at 11% to 29% discounts to the prices of recent Grade A office transactions, signaling there is still value to remain vested in office REITs.

DBS’s top stock picks are Keppel REIT (KREIT) with a target price of S$1.26 and CapitaLand Commercial Trust (CCT) with a target price of S$1.70.

Song likes KREIT’s 23% discount to book value with reduced tenancy renewal risks as 90% of leases are not due until 2018 and beyond.

Meanwhile, CCT’s steady growth on the back of recent acquisition of the remaining 60% stake in CapitaGreen makes it attractive to the analyst.

Units of KREIT and CCT are trading at S$1.13 and S$1.63 respectively. —

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