Due to limited supply coming online and better than expected demand, we believe office fundamentals are more benign than expected. In our view, office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. In addition, core CBD vacancies also showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%, and expect a similar trend for vacancies ahead. Note that since our upgrade of Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% versus the STI’s 0.2% gain. Maintain OVERWEIGHT on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23].
Office rentals decline likely to slow in 3Q12
We believe the office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. Over 2Q12, Grade A office rentals fell 4.7% QoQ to S$10.10 which cumulated in an 8.7% decline over three quarters. Core CBD vacancies, however, showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%. A similar picture was seen for island-wide vacancy rates which declined 0.9 ppt to 6.4% (end 2Q12) from 7.3% (end 1Q12). We expect a similar trend for vacancies in 3Q12 which would likely contribute to a muted rate of rental decline.
Office absorption coming in above expectations
The 2Q12 decline in vacancies was mostly due to net absorption coming in at ~470k sq ft – in line with our forecast but markedly above market expectations which had anticipated a softer demand on macro-economic weaknesses. Grade A capital values also dipped an estimated 2% QoQ marginally to $2,450 psf in 2Q12 (1Q12: S$2,500 psf) as investment sales slowed and market players adopted a wait and see attitude in light of the residual uncertainty in the macro-economy.
Limited supply till 2H13
Looking ahead to the remainder of FY12, it is likely that a situation of limited office pipeline completion would ensue with only ~70k sq ft of office space slated for opening – a mixed use development in Upper Pickering St – which has been fully pre-leased to AGC. We see this dynamic continuing until mid 2013 when Asia Square T2 and The Metropolis T1&2 are slated for completion.
Maintain OVERWEIGHT on Office REITs
We note that, since we have upgraded Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% against the STI’s 0.2 gain%. We maintain an OVERWEIGHT rating on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23] .
No comments:
Post a Comment