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Adding UOL in bet on office recovery; selling Fischer Tech

Trinity Chua Published on Fri, Mar 31, 2017 / 10:27 AM GMT+8

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SINGAPORE ( March 31): Office rents have been depressed in recent years owing to a glut of supply and downsizing by some tenants. But the sector could be on a rebound, according to industry watchers and property experts. Our cover story last week (Issue 722, “Trough times”) highlighted that leasing activity is improving and new supply is being snatched up this year. At the same time, the supply of office spaces is tapering off. Alan Cheong, senior director of Savills’ research and consultancy unit, expects gross rental for CBD-grade offices to fall 10% in 2017, before rising 0.6% in 2018 and surging another 6.2% in 2019.

Against this backdrop, we are adding local property developer and landlord UOL Group to our Singapore Market Portfolio. The company has a clutch of commercial properties, and a reputation of being a conservative developer. It has lagged its peers in the recent property stocks rally. City Developments is up more than 23%, while CapitaLand is up 21% this year. UOL has gained just 14%.

We think there is more upside to this stock as the commercial property market improves. Meanwhile, UOL is undervalued relative to its holdings. The company has direct stakes in Novena Square, United Square, Faber House, Odeon Tower and One Upper Pickering. These properties were valued at $3.1 billion in its latest annual report for FY2016 ended last December.