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PR Newswire
07-11-2011, 05:17 AM
Business Times - 07 Nov 2011
Office, industrial Reits face rental squeeze
About 933,000 sq m of gross floor area of office space is in the pipeline from GLS sites awarded this year
By MINDY TAN
(Singapore)
IN current volatile times, real estate investment trusts (Reits) have emerged as favourites for defensive plays. But analysts caution that investors should still be highly selective with Reits, as not all will be equally resilient to economic shocks.
In particular, rents might be an area of concern for office and industrial Reits, analysts say.
According to URA statistics, about 933,000 square metres of gross floor area (GFA) of office space is in the pipeline, with more to come, from the Government Land Sales (GLS) sites awarded this year.
With 62 per cent of the space, or 574,000 sq m currently under construction, this could add stress to rents.
Median office rental rates rose by 9 per cent in the third quarter, to $9.49 psf per month. Occupancy rate for prime offices improved 2.7 per cent quarter on quarter.
In October, K-Reit Asia announced that it was purchasing an 87.5 per cent interest in Ocean Financial Centre from its parent company, Keppel Land - for a period of 99 years - for $1.57 billion.
Following the announcement, Moody's Investors Service changed its outlook on K-Reit's 'Baa3' corporate family rating to positive from stable. Standard & Poor's Ratings Services (S&P) has initiated coverage with a 'BBB' long-term corporate credit rating and a 'stable' outlook.
DBS Group Research too was largely positive on the deal, which values the asset at $2,600 per square foot, inclusive of income support. 'Although timing was a little unexpected, we see this deal as a strategic long term positive for K-Reit with the ability to deepen its presence in the prime CBD area, upgrade its portfolio quality and ensure strong and stable income stream for unitholders through long leases and bluechip tenant base.'
Separately, Suntec Reit issued two announcements in quick succession, following its third-quarter earnings announcement, which saw distribution per unit of 2.533 cents, up 1.2 per cent year on year.
The first, its divestment of Chijmes for $177 million, was well-received by analysts. DBS Group Research noted that the divestment was a 'small but nice surprise', given that 'while the property performance has been consistent, in our view it may not be a good fit to Suntec Reit's current portfolio'.
News of the $410 million asset enhancement initiative (AEI) - $230 million for Suntec City Mall and $180 million for Suntec Convention Centre - on the other hand, met with mixed reactions.
While some analysts said that the AEI was necessary to keep Suntec City relevant, others argued that the resultant gearing might be too high. According to Standard Chartered, the Reit's gearing could rise to some 42 per cent upon completion of the project, although it qualified that this was likely to be mitigated by the gradual nature of the expenditure.
'We continue to think that Suntec Reit could sell assets to raise equity to reduce its gearing. Strata office spaces in Suntec Office Towers could be sold, or Park Mall could be divested. If (it) manages to sell Park Mall at 20 per cent above current book value of $338 million, gearing could fall to approximately 38.5 per cent.
'However, this could still seem high as the Reit's gearing could rise to some 47 per cent if office capital values fall 25 per cent as we forecast.'
Over in the industrial sector, Credit Suisse warned that perception of industrial Reits' defensiveness, due to its longer lease tenures is misplaced, citing high industrial rents, and Singapore's high exposure to the United States and European economies.
Industrial rents have not only surpassed pre-subprime crisis peaks but are at 10-year highs, said Credit Suisse.
'We expect flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate from hereon due to the oncoming supply pressure (including new supply of decentralised office space).'
Standard Chartered, in a report released mid-October, agreed with the prognosis, citing high supply and falling office rents as key contributors to falling business park rents.
'We expect business park rents to fall from the current $3.60 psf per month to $3 psf per month by end-2012E and $2.50 psf per month by end-2013E. This implies a 30 per cent decline over the next two years, ie back to 2007-levels.'
Standard Chartered had earlier cut prime office rents forecast by 25 per cent, due to low leasing activity and expectations of slower growth in 2012. The slower demand for office space is expected to spill over to business parks, suppressing tenants' willingness to pay for higher rents, it said.
In the retail sector, analysts were generally optimistic on Frasers Centrepoint Trust. UOB Kay Hian expects Causeway Point to be the key growth driver in 2012, seeing as how it recorded strong rental reversions of 9-22 per cent in FY11, and is on track to reach 22 per cent NPI growth post-AEI.
While the acquisition of Bedok Point diversifies FCT's portfolio, UOB also noted that there was room for improvement, particularly in the areas of the unoccupied space in the basement, and lack of strong anchor tenants.
It maintained a 'buy' call, with an unchanged target price of $1.75.
Office, industrial Reits face rental squeeze
About 933,000 sq m of gross floor area of office space is in the pipeline from GLS sites awarded this year
By MINDY TAN
(Singapore)
IN current volatile times, real estate investment trusts (Reits) have emerged as favourites for defensive plays. But analysts caution that investors should still be highly selective with Reits, as not all will be equally resilient to economic shocks.
In particular, rents might be an area of concern for office and industrial Reits, analysts say.
According to URA statistics, about 933,000 square metres of gross floor area (GFA) of office space is in the pipeline, with more to come, from the Government Land Sales (GLS) sites awarded this year.
With 62 per cent of the space, or 574,000 sq m currently under construction, this could add stress to rents.
Median office rental rates rose by 9 per cent in the third quarter, to $9.49 psf per month. Occupancy rate for prime offices improved 2.7 per cent quarter on quarter.
In October, K-Reit Asia announced that it was purchasing an 87.5 per cent interest in Ocean Financial Centre from its parent company, Keppel Land - for a period of 99 years - for $1.57 billion.
Following the announcement, Moody's Investors Service changed its outlook on K-Reit's 'Baa3' corporate family rating to positive from stable. Standard & Poor's Ratings Services (S&P) has initiated coverage with a 'BBB' long-term corporate credit rating and a 'stable' outlook.
DBS Group Research too was largely positive on the deal, which values the asset at $2,600 per square foot, inclusive of income support. 'Although timing was a little unexpected, we see this deal as a strategic long term positive for K-Reit with the ability to deepen its presence in the prime CBD area, upgrade its portfolio quality and ensure strong and stable income stream for unitholders through long leases and bluechip tenant base.'
Separately, Suntec Reit issued two announcements in quick succession, following its third-quarter earnings announcement, which saw distribution per unit of 2.533 cents, up 1.2 per cent year on year.
The first, its divestment of Chijmes for $177 million, was well-received by analysts. DBS Group Research noted that the divestment was a 'small but nice surprise', given that 'while the property performance has been consistent, in our view it may not be a good fit to Suntec Reit's current portfolio'.
News of the $410 million asset enhancement initiative (AEI) - $230 million for Suntec City Mall and $180 million for Suntec Convention Centre - on the other hand, met with mixed reactions.
While some analysts said that the AEI was necessary to keep Suntec City relevant, others argued that the resultant gearing might be too high. According to Standard Chartered, the Reit's gearing could rise to some 42 per cent upon completion of the project, although it qualified that this was likely to be mitigated by the gradual nature of the expenditure.
'We continue to think that Suntec Reit could sell assets to raise equity to reduce its gearing. Strata office spaces in Suntec Office Towers could be sold, or Park Mall could be divested. If (it) manages to sell Park Mall at 20 per cent above current book value of $338 million, gearing could fall to approximately 38.5 per cent.
'However, this could still seem high as the Reit's gearing could rise to some 47 per cent if office capital values fall 25 per cent as we forecast.'
Over in the industrial sector, Credit Suisse warned that perception of industrial Reits' defensiveness, due to its longer lease tenures is misplaced, citing high industrial rents, and Singapore's high exposure to the United States and European economies.
Industrial rents have not only surpassed pre-subprime crisis peaks but are at 10-year highs, said Credit Suisse.
'We expect flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate from hereon due to the oncoming supply pressure (including new supply of decentralised office space).'
Standard Chartered, in a report released mid-October, agreed with the prognosis, citing high supply and falling office rents as key contributors to falling business park rents.
'We expect business park rents to fall from the current $3.60 psf per month to $3 psf per month by end-2012E and $2.50 psf per month by end-2013E. This implies a 30 per cent decline over the next two years, ie back to 2007-levels.'
Standard Chartered had earlier cut prime office rents forecast by 25 per cent, due to low leasing activity and expectations of slower growth in 2012. The slower demand for office space is expected to spill over to business parks, suppressing tenants' willingness to pay for higher rents, it said.
In the retail sector, analysts were generally optimistic on Frasers Centrepoint Trust. UOB Kay Hian expects Causeway Point to be the key growth driver in 2012, seeing as how it recorded strong rental reversions of 9-22 per cent in FY11, and is on track to reach 22 per cent NPI growth post-AEI.
While the acquisition of Bedok Point diversifies FCT's portfolio, UOB also noted that there was room for improvement, particularly in the areas of the unoccupied space in the basement, and lack of strong anchor tenants.
It maintained a 'buy' call, with an unchanged target price of $1.75.
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