Office Reits to outdo industrial: StanChart

SINGAPORE's office real estate investment trusts (Reits) are likely to offer higher dividend yields than industrial Reits by 2016, said Standard Chartered Research. This will be on the back of rising supply of business park space, which will depress rents. Warehouse rents are also predicted to fall.

But the bank is more sanguine about prospects for the Singapore office sector.

In an equity research note yesterday, StanChart issued a call to buy office Singapore Reits (SReits), CapitaCommercial Trust, Suntec Reit and Keppel Reit, with average upside potential of 7-14 per cent to its new price targets, and to sell industrial SReits, Ascendas Reit (A-Reit), Mapletree Industrial Trust (MIT) and Mapletree Logistics Trust (MLT), with average downside potential of 2-15 per cent to its new price targets.

"Among the SReits, we believe office SReits provide the best growth profile and largest discount to net asset value (NAV)," it said.

The three largest industrial SReits trade at 1.2 times price-to-NAV, but the bank expects the average distribution per unit (DPU) to fall at a 3.5 per cent compounded annual growth rate (CAGR) over 2014 to 2016.

"The three largest office SReits trade at 0.9 time price-to-NAV, but we estimate DPU CAGR of 9.6 per cent in 2014-16."

The bank forecast that the three liquid office SReits will offer an average DPU yield of 6.7 per cent in 2016, which would be 14 per cent higher than the three industrial SReits' average DPU yield of 5.9 per cent.

Noting that industrial occupancy rates fell on low demand last year, it predicted that industrial rents will fall 4-7 per cent per annum in 2014-16. A-Reit and MIT reported that their business park occupancy fell to 80 per cent from 92 per cent in 2013, despite overall supply edging up 0.3 per cent. "With supply of business parks rising by 9 per cent per annum in 2014-16E, we now expect rents to fall 22 per cent in this period (from 0 per cent previously). We also expect warehouse rents to fall 14 per cent in 2014-16," the bank said.

Historically, industrial Reits have traded at a price-to-NAV ratio that is 15 per cent higher than the overall sector, potentially due to perceived resilience of such portfolios. "This may no longer hold. In the past three years, A-Reit's weighted average lease expiry has fallen to 3.9 years from 4.7 years and industrial portfolio occupancy has fallen to 88 per cent from 97 per cent. We cut large-cap industrial Reits' price targets by 8 per cent on average. We downgrade MIT and MLT to Underperform from In-Line. Our lowered price targets imply 1.10x P/NAV."

Office Reits are expected to trade up on higher occupancy and rental growth in the next six months. "We believe pre-commitment levels for CapitaGreen could reach 50-80 per cent by end-Q3 2014, from 12 per cent in Q1 2014. We expect prime office rents to rise 40 per cent in 2014-15 on low supply and strong demand. This is 10-20 per cent more bullish than market expectations. In Q1 2014, prime office rents rose 5 per cent quarter-on-quarter."

StanChart expects office supply to grow at just 1.6 per cent per annum in 2014-16, compared with supply growth of 9 per cent per annum for business parks, 4 per cent for multi-user factory space and 5 per cent for warehouses.

"Weak demand conditions in Singapore are symptomatic of a policy-led population slowdown. The government is deliberately allowing the population to grow at 1-2 per cent per annum in the next few years and expects economic growth of 2-4 per cent per annum, resulting in low demand for office and industrial space. In the past 12 months, office SReits' portfolios have shown occupancy gains of 347 basis points (bps), while industrial SReits have shown occupancy declines of 290bps."

It expects office demand to grow at 1.5 per cent per annum, in line with the official policy of slowing workforce growth.

"Our channel checks with HR experts and leasing agents indicate that the curbs could affect business park demand more than office demand. However, if office demand grows even slower than expected, there could be downside to our prime office rent forecasts."

Source: Business Times, 21 May 2014