Singapore Office REITs - A bright spot in 2014
Written By Stock Fanatic on Wednesday, February 19, 2014
• We believe office S-REITs are compelling for their exposure to a segment that is experiencing a recovery in spot rents
• Price weakness since 4Q13 has made valuations more attractive; trading at PBRs of 0.78-0.82x vs. S-REIT weighted avg of 0.94x
• We upgrade CCT to Buy (1) from Outperform (2), and KREIT to Outperform (2) from Hold (3); Suntec remains our top pick
■ What's new
After the sector’s lacklustre unitprice performance so far in 2014, we reiterate our Positive rating for the Singapore office REITs and turn more bullish on a few of them.
■ What's the impact
We believe office S-REITs are still compelling now because they offer investors exposure to one of the few bright spots in 2014: the Singapore Office Sector. The office sector has traditionally been regarded as procyclical and high-beta (ie, risky). The irony is that the Singapore office cycle has turned countercyclical, with office rents now recovering from the bottom of the cycle and starting to appreciate when rental growth for other segments appears to be moderating sharply (retail and industrial) or in decline (hospitality).
Meanwhile, office S-REITs are still trading at PBRs (end-2013 book values) of 0.78-0.82x compared with the weighted-average PBR of 0.94x for the overall S-REIT sector. We believe the PBR discrepancy is not justified and expect it to narrow if the rental-growth trends for the property segments continue to diverge.
We remain cautiously optimistic on office rents and believe the following factors will dampen rental growth compared with those in previous recoveries:
1) the availability of quality decentralised office space in Jurong East, Paya Lebar, and One- North,
2) the considerable amount of vacant stock in the CBD downtown core,
3) a significant increase in new supply from 2016, and
4) lingering economic uncertainty.
Overall, we forecast annual average office rents to increase by 5.4% YoY for 2014 and 6% YoY for 2015, after having declined by 0.7% YoY for 2013. We see some upside risk to our office-rent forecasts, and if the office-market recovery is much stronger than expected in 2014, it could even lead to sector-wide yield compression and positive returns for the S-REIT sector – possibly similar to what occurred in the market from mid-2006 to mid-2007.
We are revising down our DPU forecasts by 0.1-6.8% for 2014 and by 0.7-6.3% for 2015 after incorporating minor assumption changes and the S-REITs’ 4Q13 results (announced in late January 2014) into our forecasts. We have made negligible changes to our 6- month target prices, pegged to our DDM valuations.
■ What we recommend
With their greater potential upside to our new target prices after their unit-price corrections since 4Q13, we upgrade CapitaCommercial Trust (CCT) (CCT SP, SGD1.395) to Buy (1) from Outperform (2) and Keppel REIT (KREIT) (KREIT SP, SGD1.145) to Outperform (2) from Hold (3).
We reiterate our Buy (1) on Suntec REIT (Suntec) (SUN SP, SGD1.665), which remains our top pick for its strong DPU-growth prospects for 2014-16E. The downside risk to our Positive sector rating would come either from a sudden and sharp increase in 10- year Singapore government securities (SGS) yields or more negative economic news and cuts to the market’s GDP-growth forecast for 2014, which would inevitably dampen demand for office space.
■ How we differ
We believe the market could still be underestimating the sector’s medium-term DPU-growth potential, as our DPU forecasts are higher than those of the Bloomberg consensus by 8-17% for 2015 and by 13-24% for 2016.
Publish date: 18/02/14