Analysts at DBS Group Research have named Singapore offices as the “star” among Singapore REITS (S-REITS) amid uncertainties. They have named Keppel REIT (KREIT) and Mapletree Pan Asia Commercial Trust N2IU (MPACT) as their preferred REITS, and OUE LJ3 Commercial REIT TS0U (OUECT) as their mid-capitalisation pick.
As office S-REITs have 54%-93% of their overall valuation attributable to the Singapore office sector, market concerns on potential de-rating of office asset valuations are “likely unfounded”, says DBS.
The overall metrics of positive reversions driving cash flows, high return to office statistics at more than 85% for office, and supportive demand-supply dynamics in the coming years, as well as a stabilising interest rate environment has made DBS turn more positive on the sector.
DBS’s economists expects Singapore’s gross domestic product (GDP) growth to improve in 2024, and their analysis indicates that demand in finance and insurance sector (largest tenants of CBD offices in Singapore) has reached a trough.
“We believe the scarcity of Grade A Core CBD space will likely persist longer than expected due to the absence of new office sites and removal of offices for redevelopment,” DBS analysts note. “This trend is projected to drive the overall vacancy rate to below 4% within the next 2 years (or earlier if demand stems from economic growth). Thus, overall rents could remain steady — a catalyst for the office sector — rather than decline.”
The analysts also believe that with expectations of interest rates finally peaking, the year-end asset valuation update for office S-REITS could show more resilience. In their stress test analysis, commercial/office S-REITs are likely to maintain their gearing below 45% even on the back of a 10% decline in portfolio valuation, supported by a strong Singapore asset base.
As such, they expect the final overhang to be lifted soon as asset values are likely to remain stronger than expected.
Considering that the analysts have an assumed asset “write-off” of 5%-7%, the sector is trading at 0.7x adjusted p/bv, close to -1 standard deviation (s.d.) of the mean while offering an FY2024 yield of more than 6% above historical average.
The analysts say that this suggests that risk of asset value write-offs is more than priced in.
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“We have factored in higher-for-longer interest rates in our estimates and distribution per units (DPUs) are likely to bottom out in FY2024. We project FY2025 DPU may potentially grow
by 3% y-o-y,” they say.
As such, they prefer KREIT and MPACT on attractive valuations, at more than 6% yield and a p/bv of less than -0.5 s.d.. Meanwhile, OUECT is their mid-capitalisation pick representing a 8% yield, 0.5x p/bv with no refinancing risk and upside from the hospitality segment.
