SINGAPORE (June 22): OCBC is maintaining its “overweight” status on Singapore’s office sector, on the belief that investor scepticism over the value of Singapore’s grade ‘A’ office buildings is unwarranted.
This comes with the Urban Redevelopment Authority’s (URA) recent acceptance of an application from a developer to put a 2ha, 99-year leasehold commercial site at Beach Road for sale by public tender, which will be launched in about two weeks’ time.
In a Thursday report, lead analyst Derek Song estimates the breakeven cost for the project to range from $1,697-$1,826 psf of gross floor area (GFA), or $2,121-$2,283 on psf of net lettable area (NLA) – which implies a price psf of NLA of between $2,333 to $2,511.
“Similar to the Central Boulevard site, the tender for the Beach Road land parcel highlights the undervalued status of the office Singapore REITs (S-REITs) which are trading below replacement cost,” notes Song.
“The Singapore portfolios for the various office S-REITs, which are predominately located in the CBD or more prime locations compared to the Beach Road site, are currently trading on an implied price of $2,100-2,500 per sq ft of NLA,” he adds.
Song has hence identified Keppel REIT (K-REIT) as his top “buy” pick at a target price of $1.23, as he believes it has the least tenancy risks among the office S-REITs with only 2.8% of leases due for expiry for the remainder of 2017.
“In addition, [K-REIT’s] Singapore office portfolio, at an implied price of c.$2,500 per sq ft, is at a discount to comparable buildings in recent market transactions, the proposed office block on the Central Boulevard site (implied price in excess of $3,000 per sq ft on a completed basis) and rumoured bid for Asia Square Tower 2 by CapitaLand at $2,800 per sq ft,” says the analyst.
As at 10.36am, units of K-REIT are trading 0.4% higher at $1.15.
