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Singapore Office Rents Set to Surpass Pre-Pandemic Peak: Is It Time to Buy Commercial REITs?

·4-min read
Singapore CBD
Singapore CBD

Both commercial and industrial REITs have proven resilient during the pandemic.

The last two years saw many businesses shift online in a massive move towards digitalisation as movement restrictions prevented people from heading back to the office.

Now that restrictions have eased in many parts of the world, workers are slowly trickling back into the office.

Jones Lang Laselle (JLL), a real estate services company, recently reported that Grade A office rents in the central business district (CBD) has continued its climb.

This was the fifth straight quarter that rents have risen, increasing to S$10.74 per square foot per month (psfpm) in the second quarter of 2022 (2Q2022), up 2.7% quarter on quarter.

At this level, rents are just a whisker away from the pre-pandemic high of S$10.81 psfpm set in 4Q2019.

Should dividend-seeking investors consider buying into commercial REITs to take advantage of this trend?

No pure-play commercial REIT

First off, let’s tally the list of REITs with exposure to Singapore commercial properties.

It may come as a surprise to know that there is no pure-play Singapore commercial REIT listed on the Singapore stock exchange.

One of the more prominent REITs backed by sponsor CapitaLand Investment Limited (SGX: 9CI) is CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.

Of CICT’s total assets under management (AUM) of S$22.9 billion, 39% comprise office properties with 93% of the portfolio based in Singapore real estate.

For Keppel REIT (SGX: K71U), more than three-quarters of its S$8.9 billion Grade A commercial portfolio was in Singapore properties.

Mapletree Commercial Trust (SGX: N2IU), or MCT, has a portfolio comprising retail and commercial properties in Singapore.

For its fiscal 2022 (FY2022), around 63% and 65% of the REIT’s gross revenue and net property income (NPI) came from commercial properties, respectively.

Suntec REIT (SGX: T82U) has around one-third of revenue and 35% of NPI attributable to Singapore commercial properties for 1Q2022.

The fifth REIT to have exposure to Singapore office property is OUE Commercial REIT (SGX: TS0U), which owns prominent buildings such as OUE Bayfront and One Raffles Place.

Slightly more than half of the REIT’s assets are in Singapore office properties while 55.8% of total revenue comes from this segment.

A majority of these REITs will benefit

Drilling a little deeper, we delve into the average rents and rent reversion for the above REITs.

CICT’s Singapore office assets reported rent of S$10.49 psfpm with an upward rent reversion of 9.3% for 1Q2022.

The latest rent of S$10.74 psfpm is 2.4% higher than CICT’s reported passing rent, implying there is further room for rental rates to move higher.

Average expiring rents for Keppel REIT’s Singapore office leases are S$10.10 psfpm for 2022, S$10.84 psfpm for 2023, and S$10.72 psfpm for 2024.

As rents are on an upward trend and Keppel REIT has the bulk of its portfolio in Singapore, the office REIT looks set to receive revenue and NPI boost.

MCT also saw positive rental reversion for its office and business park segment of 1.7% for FY2022, and the retention rate stood at close to 88% by net lettable area (NLA).

Committed occupancy for Suntec REIT’s office portfolio remained high at 97.8% as of 31 March 2022 with a positive rent reversion of 5.1%.

The average expired rents for OUE Commercial REIT’s Singapore commercial assets were more varied, ranging from a low of S$8.68 psfpm for OUE Downtown Office to S$12.93 psfpm for OUE Bayfront.

Stick with strong sponsors and a track record

The good news is that REITs are reporting healthy numbers and robust operating statistics for their Singapore office portfolios, and this trend looks set to continue after JLL’s findings.

As a rule, you should stick with REITs that have strong sponsors with a proven track record of delivering healthy distribution per unit (DPU) increases.

Keppel REIT’s DPU has risen year on year since FY2019, demonstrating its resilience in the face of the pandemic.

It also has Keppel Corporation Limited (SGX: BN4), a blue-chip conglomerate, as its sponsor.

CICT saw its DPU get hit in 2020 due to its retail component, but it has managed a tentative recovery in FY2021 with DPU rising by 19.7% year on year to S$0.104.

MCT saw its DPU for FY2022 inch up 0.4% year on year to S$0.0953 despite its retail property, VivoCity, getting hit by movement restrictions.

With a strong sponsor in Mapletree Investments Pte Ltd and the impending merger with Mapletree North Asia Commercial Trust (MNACT) (SGX: RW0U), it should continue to perform well.

Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.

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Disclaimer: Royston Yang owns shares of Suntec REIT.

The post Singapore Office Rents Set to Surpass Pre-Pandemic Peak: Is It Time to Buy Commercial REITs? appeared first on The Smart Investor.

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