SINGAPORE (May 11): OCBC Research and CGS CIMB Securities are maintaining their “hold” call on OUE Commercial REIT (OUECT) with target prices of 68 cents and 75 cents respectively on narrowing negative reversion gap due to rising office spot rents.
OUECT’s 1Q18 revenue dropped 1.6% y-o-y to $44.1 million, forming 24.5% of OCBC’s full-year estimate. “We believe this stems from continued (but narrowing) negative rental reversions,” says OCBC analyst Joseph Ng in a Friday report.
OUE Bayfront’s occupancy remained stable q-o-q at 98.2% while average passing remained relatively unchanged q-o-q at $11.42psf/month at end 1Q. New/renewal leases were contracted at between $11.30-13.90psf compared to the average expiring level of $13.26psf, as the broader office leasing market improves.
Lippo Plaza continued to perform well with average passing rent at RMB9.85 psm/day ($2.08 psm/day). The property has 24.3% of NLA expiring in FY18 and a further 36.5% in FY19. We believe the property should do well, underpinned by robust demand, despite rising supply in the Shanghai market.
Spaces, a co-working operator, will be occupying more than 35,000 sf at the One Raffles Place Shopping Mall in early-2019. We believe that part of their requirements will be met by the space vacated by the mall’s current anchor tenant that is occupying 22,000 sf of space. While the overall increase in demand for space at the mall is a positive, OCBC believes that there could be a transitional period of approximately half a year.
While narrowing negative reversions still remains OCBC’s base case, Ng prefers to wait for more demonstrable evidence of this, especially as 13.5% of One Raffles Place’s office gross rental income expires in 2H18.
“Upside risk to our call would be a faster-than-expected office rental market recovery, while downside risk includes slow take-up of office space,” says CGS CIMB analyst Lock Mun Yee in a Thursday report.
Based on the trading price of 72 cents as at 3.14pm, OUECT trades at a FY18F yield of 6.2%, which is 2 SD below its three-year historical mean.
