Excerpts from analysts' report
Credit Suisse analysts: Nicholas Teh & Daniel Lim
| We spoke to several real estate consultants/agents to get an update on the latest leasing environment. The key highlights were: ● (1) Duo is about 30% pre-committed, Guoco Tower is in advanced negotiations with several CBD tenants while Marina One has not secured any tenants. Marina One's asking rents are in line with the market but could be brought down later on. (2) Most of the higher spec suburban/fringe space has been taken up reducing the threat from decentralisation.  The developer of Marina One is M+S Pte Ltd, owned 60:40 by Malaysia’s strategic investment fund, Khazanah Nasional and Singapore’s investment company, Temasek.● (3) Shadow space is estimated at 700-800k sq ft while expectations are for rents to fall 10-20% in 2016, implying negative to +5-10% reversions for the REITs. (4) Valuers have not factored in higher rates into cap rates or discount rates which will put pressure on valuations (KREIT and SUN valuations look most at risk) ● We believe the news flow on the office sector will continue to remain poor and competition for tenants will intensify. As such, we are cautious on the sector, our preference is for the suburban retail REITs where we like CMT and FCT, then industrial – KDCREIT, MINT and AREIT. |
We spoke to several real estate consultants/agents to get an update on the latest leasing environment. The key highlights are below:
Update on incoming offices
Of the three large office buildings entering the market in 2016/17, Marina One (est 2017), Duo (est Sept 2016) and Guoco Tower (est June 2016). So far, only Duo has achieved pre-commitment of about 30%. Guoco Tower is in advanced negotiations with tenants from other buildings in the CBD while Marina One has not secured any tenants yet.
We understand that Marina One has not started undercutting market rents, however, this could change as the building has essentially no land cost given the land swap between Malaysia and Singapore, allowing for more flexibility on rents. Significant delays in Marina One's launch would be a positive for the office market - so far, target completion dates have been maintained.
Decentralisation has slowed
With Westgate largely filled (>90%), the availability of high spec suburban office space (such as, Westgate, Metropolis and MBC I) is limited. As such, decentralisation is expected to slow in the near term. Additionally, there is also a hiring advantage to having a CBD address, and some firms which have moved to decentralised locations have experienced issues on talent retention. Business Parks do pose a threat but companies which qualify to rent space are limited.
Shadow space will continue putting pressure on rents
Shadow space is estimated at 700-800k sq ft for spaces expiring over 2015/16. So far, shadow space which has entered the market has facilitated expansion plans given the lack of supply in 2015, however, it has also put pressure on rents by providing alternatives for tenants. At the moment, occupancy is still relatively high in the CBD, with URA data putting downtown occupancy at 90.7% as of 2Q15 but supply will pick up and more shadow space will become readily available in 2016.
Rent expectations
Consultants expect rents to fall in 2016 as the market continues to weaken, with declines in spot rents ranging between 10% and 20%. At - 20% this would imply negative single-digit rent reversions for the REITs, and at -10% this would imply about +5-10% reversions. We have factored in rent reversions of 5-10% for CCT, KREIT and Suntec offices. Tech, Media, pharmaceuticals and insurance sectors have been the top demand drivers for office space, but there has been no replacement for the absence of demand from banks. As such, we expect demand to remain below the 1 mn sq ft historical average.
 "Valuers have not factored in rate hikes yet Valuers are waiting till the Fed actually raises rates before factoring in any form of higher rates, despite interest rates already moving ahead in anticipation. As a result, cap rates and discount rates for valuers have remained largely unchanged for the revaluations in 2015. We note that the NPI yields of several of the office buildings are below current valuer cap rates and are at risk of a devaluation. Additionally, we would note that consultants turned significantly more bearish on their rent forecasts in 1Q15 for office, which could also weigh in on their valuations. "Competition for tenants will intensify We believe that competition in the office sector will continue to intensify and remain cautious on the sector. Our preference is for the suburban retail REITs where we like CMT and FCT, then industrial – KDCREIT, MINT and AREIT." |
