Singapore's office REITs could shrug off falling rents

SINGAPORE (Sept 9): Maybank Kim Eng has upgraded two Singapore office REITs, CapitaLand Commercial Trust (CCT) and Keppel REIT, to “buy” from “hold”, even as office rents are expected to continue to slide in the near term.

“We believe the issue is well-flagged and the market could instead focus on a bottom,” says Maybank analyst Derrick Heng in a Thursday report. “We expect rents to bottom over the next 5-6 quarters and REIT prices could react ahead.”

Grade A office rents have fallen for five consecutive quarters to S$9.50 psf per month, a cumulative decline of 17%, according to 2Q16 data from CBRE.

Maybank says this puts us halfway through the office rental downcycle, going by history. “If the previous downcycle is repeated, rents could bottom over 12-13 quarters, after retreating by 30-33% from their last peak,” says Heng.

To reflect lower property income from expected declines in market rents over the next two years, Maybank is lowering its DPU forecasts for office REITs by 1.8% lower for FY2017 and 4.6% lower for FY2018.

For Keppel REIT and CCT, however, Maybank says “negative impact on DPUs should be attenuated by relatively low lease expiry near term”.

Meanwhile, Heng believes “fierce competition” for the tender of a white site at Central Boulevard in the Marina Bay precinct could “send a positive signal for office assets”.

“Good prices in recent transactions of nearby properties could encourage strong bids. As the minimum committed price is already in line with recent land deals, we think the final price could be higher,” Heng says.

Maybank is keeping CapitaLand Commercial Trust as its top pick for the sector. CCT was raised to “buy” from “hold”, with a higher target price of S$1.81, from S$1.52 previously.

Keppel REIT was also raised to “buy” from “hold”, with a higher target price of S$1.21, from S$1.05 previously.

As at 1.33pm, units of CapitaLand Commercial Trust is trading flat at S$1.64 and units of Keppel REIT is trading 0.4% lower at S$1.12. —  

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