Over 2H11, we saw office rents peak as Grade A rents declined 0.5% QoQ in 4Q11 while Grade B rents fell by 0.4%. We expect further rental dips in FY12 and believe, from our channel checks, that Grade A rents has already fallen 3-5% QoQ in 1Q12. Going forward, we think office capital values could come under pressure with declining rentals, accompanied by cap rate expansion, as major players re-evaluate the office cycle. In general, while the downside from current levels of distributable income is likely capped as we enter a phase of renewing leases signed over the previous trough (2H09-2H10), we see key risks to share prices stemming from fair value write-downs should capital values ease significantly. That said, this is mostly balanced out by currently undemanding valuations (sector average PB: 0.7x) and relatively robust balance sheets (sector average gearing: 35%). Maintain NEUTRAL on the office REITS. Downgrade CCT to HOLD (FV: S$1.14); maintain HOLD on Suntec (FV: S$1.10). Our top pick is FCOT (BUY, FV: S$0.94)
Office rentals peaked in 2H11
Over 2H11, we saw office rents peak as Grade A rents declined 0.5% QoQ in 4Q11 while Grade
B rents fell by 0.4%. Vacancy rates also increased – Grade A vacancies came up from 10.9% (3Q11) to 11.6% (4Q11); CBD vacancies from 7.7% to 8.8%. We also judge pre-leasing activity at major new buildings to be somewhat sluggish (One Raffles Place - 42% pre-committed, MBFC T3 - 62%).
Too early to call office bottom
We expect further rental dips in FY12 and believe, from our channel checks, that Grade A rents has already fallen 3-5% QoQ in 1Q12. Given continued macroeconomic uncertainties and an ample office pipeline of 4.2m sqft NLA in FY12-13, we now forecast office rentals to fall 10-15% in FY12 and believe that it is too early to call a bottom for rentals at this juncture.
Office capital values to come under pressure
Going forward, we think office capital values could come under pressure with softening rentals expectations, accompanied by cap rates expansion, as major players re-evaluate the office cycle. Major office transactions have been limited year to date, with CCT’s purchase of 20 Anson at S$430m (S$2.1k psf) in Feb 12 as the first sizable transaction. We also note that Robinson Point is reportedly on the market for about S$306m (S$2.3k psf). In our view, the transaction price for this asset, if sold, could be a touchstone for office capital values ahead, particularly if put against Robinson Centre next door which sold for S$2.2k psf (S$293m) only in Oct 11.
Maintain NEUTRAL on office REITS
In general, while the downside from current levels of distributable income is likely capped as we enter a phase of renewing leases signed during the previous trough (2H09-2H10), we see the key risk to share prices stemming from fair value write-downs should capital values ease significantly. That said, this is mostly balanced out by currently undemanding valuations (sector average PB: 0.7x) and relatively robust balance sheets (sector average gearing: 35%). Maintain NEUTRAL on the office REITS. Downgrade CCT to HOLD (FV: S$1.14); maintain HOLD on Suntec (FV: S$1.10). Our top pick is FCOT (BUY, FV: S$0.94) due to its diversified regional exposure and attractive valuation (0.4x PB; 7.9% FY12 yield).
Over 2H11, we saw office rents peak as Grade A rents declined 0.5% QoQ in 4Q11 while Grade
B rents fell by 0.4%. Vacancy rates also increased – Grade A vacancies came up from 10.9% (3Q11) to 11.6% (4Q11); CBD vacancies from 7.7% to 8.8%. We also judge pre-leasing activity at major new buildings to be somewhat sluggish (One Raffles Place - 42% pre-committed, MBFC T3 - 62%).
Too early to call office bottom
We expect further rental dips in FY12 and believe, from our channel checks, that Grade A rents has already fallen 3-5% QoQ in 1Q12. Given continued macroeconomic uncertainties and an ample office pipeline of 4.2m sqft NLA in FY12-13, we now forecast office rentals to fall 10-15% in FY12 and believe that it is too early to call a bottom for rentals at this juncture.
Office capital values to come under pressure
Going forward, we think office capital values could come under pressure with softening rentals expectations, accompanied by cap rates expansion, as major players re-evaluate the office cycle. Major office transactions have been limited year to date, with CCT’s purchase of 20 Anson at S$430m (S$2.1k psf) in Feb 12 as the first sizable transaction. We also note that Robinson Point is reportedly on the market for about S$306m (S$2.3k psf). In our view, the transaction price for this asset, if sold, could be a touchstone for office capital values ahead, particularly if put against Robinson Centre next door which sold for S$2.2k psf (S$293m) only in Oct 11.
Maintain NEUTRAL on office REITS
In general, while the downside from current levels of distributable income is likely capped as we enter a phase of renewing leases signed during the previous trough (2H09-2H10), we see the key risk to share prices stemming from fair value write-downs should capital values ease significantly. That said, this is mostly balanced out by currently undemanding valuations (sector average PB: 0.7x) and relatively robust balance sheets (sector average gearing: 35%). Maintain NEUTRAL on the office REITS. Downgrade CCT to HOLD (FV: S$1.14); maintain HOLD on Suntec (FV: S$1.10). Our top pick is FCOT (BUY, FV: S$0.94) due to its diversified regional exposure and attractive valuation (0.4x PB; 7.9% FY12 yield).
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