Office reits: OCBC is bullish

In Property, Reits on 16/02/2011 at 6:29 pm

OCBC Investment Research, late last week wrote, We found a few common themes in the guidance given by office Reit managers. Firstly, most office Reits with Grade-A office assets expect negative rental reversions to bottom out by end-2011.

In FY2010, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City also saw y-o-y declines in gross revenue contributions, but this is expected to turn around in 2011-12.

According to CB Richard Ellis (CBRE), Grade-A rents averaged $9.90 psf a month in Q4 2010, reflecting an increase of 10 per cent q-o-q and 22.2 per cent y-o-y.

Grade-A rents bottomed at $8 psf a month in Q1 2010 and have since risen some 23.8 per cent. We see room for more rental upside ahead and forecast Grade-A rents to hit $10.50 psf a month in 2011, more than $11 psf a month in 2012, and above $12 psf a month in 2013. However, non-Grade A properties will see more gradual recovery, where they will bottom out possibly only after 2012-13.

Most office Reits hold the view that earlier concerns of the ‘hollowing-out effect’ are passe, as the vacated space is readily being taken up by existing tenants wanting to expand or occupiers from other buildings. This is corroborated by CRBE findings which reported that Grade-A vacancy dipped to 2.7 per cent in Q4 2010 from 2.8 per cent in Q3 2010 and a notable turnaround from 6.2 per cent in Q4 2009, despite the new supply including Marina Bay Financial Centre (MBFC) Tower 1 in Q1 2010 and MBFC Tower 2 in Q3 2010.

On the back of the low interest rate environment and mega acquisitions completed in 2010 (MBFC Phase 1), we are seeing more office Reits shoring up their aggregate leverage ratios, with Suntec leading the pack with 40.4 per cent at end-December 2010 from 33 per cent at end-September 2010.

K-Reit’s gearing also increased from 15.1 per cent to 37 per cent, while Frasers Commercial Trust’s (FCOT) leverage remained flat at 39.8 per cent. With the exception of CapitaCommercial Trust (CCT) which pared down its debt in Q4 2010, most of the office Reits seem comfortable reverting back to the pre-crisis target gearing levels of 40-45 per cent.

We think that 40 per cent will be the new norm for FY2011. Debt headroom of $1.18 billion for the local office Reits sub-sector indicates that sizeable debt-funded acquisitions are still possible.

The four local office Reits, namely CCT, Suntec, K-Reit and FCOT, trade at an average P/B of 0.81 times, which compares favourably to the broader S-Reit sector’s 0.93 times. We remain upbeat on the office sector recovery; and maintain ‘overweight’ for the local office Reits sub-sector.


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