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This is the year for office REITs to shine: OCBC

Michelle Zhu

SINGAPORE (Jan 8): OCBC Bank is expecting Singapore office REITs to strengthen further in the near-term this year – and possibly, in the process, demand higher rents to bring about positive rental reversion.

In a Tuesday report, OCBC’s credit research team highlights office REITs as a bright spot among Singapore REITs (S-REITs), with the recent trend of strong new office supply looking to reverse in 2019.

“Based on Urban Redevelopment Authority (URA) caveats, the office supply pipeline is only 527,000 sq ft for the entire 2019. This is a drastic change from 2018 where 1.4 million sq ft TOP between 1Q-3Q18. With supply easing, we think there is room for rental prices to continue to climb and occupancy rates to improve further, possibly till the next wave of supply, which is coming in 2021/22,” notes OCBC.

OCBC particularly highlights how all office REITs under its coverage have stronger portfolio occupancy compared to the market, save for Frasers Commercial Trust (FCOT) due to its lease expiration for HP Enterprise Singapore and a reduction in leased area by HP Singapore at Alexandra Technopark.

Nonetheless, the bank expects FCOT’s leasing situation to improve going forward. It also believes the lease expiries at CapitaLand Commercial Trust (CCT) and Suntec REIT are well-timed to benefit from the strong positive momentum seen in the office segment.

Citing 3Q18 data from CBRE Research, OCBC notes that Grade ‘A’ office rent in Singapore has maintained a fairly strong growth trajectory and in fact, appears close to realising positive rental reversion.

Its research team however remains cognisant of property-specific stress related risks – especially in the case of older assets and those in the fringe of the central business district (CBD), as they may lose their competitiveness to newer buildings with more efficient floor plates, design and specifications.

“A divergence in the office market is possible is possible if refurbishments of older assets are not conducted in a timely manner,” cautions OCBC.

On the other hand, the bank says the outlook remains challenging for retail REITs as it continues to undergo a prolonged structural change, despite slowing supply and still-healthy demand from diverse tenants.

While it expects more corporate activity for industrial REITs this year on the back with improved supply-demand fundamentals, its research team believes lease rates will remain flat throughout the first half of 2019.

“Perhaps we are merely halfway through the lost decade; Singapore residential property prices as of 3Q2018 have yet to recover to the peak in 3Q2013. We think the outlook ahead looks subdued due to supply overhang from an expected uptick in launches in 2019-20 with a less-rosy economic outlook while sentiments have already deteriorated following the introduction of the Jul 2018 property cooling measures,” concludes OCBC.

As at 3:14pm, units in FCOT, CCT and Suntec REIT are trading at $1.39, $1.77 and $1.84, respectively.