While growing concerns about decelerating growth in Singapore’s GDP persist, the country has seen its 12th back-to-back quarter of accelerated demand for office space, outstripping 2012 expectations. Increased demand came from across a broad spectrum – manufacturing, trading, legal and financial services, and resources and commodities. Simultaneously, largely as a result of conversions, net supply declined. And because of across-the-board higher occupancy rates in 2012, property owners were able to hold their own on rental rates.
Can excess supply stymie rising rents?
While almost 9.7 million sq. ft of newly built office space is expected to come online over the next 5 years, and fears of a decline in the momentum of pre-leasing activity (as a result of slightly pessimistic economic factors) are being expressed, we have noticed pre-leasing of almost 42% of the current year’s supply has already taken place, proving that there may not be any merit to oversupply fears in the near-term. Consequently, it is our belief that Prime Grade A properties will continue to hold their rental values, while we see a robust 88% occupancy rate for the rest of the coming 5 year period. However, with newer business parks and competing office projects coming on-stream, we see some potential impact to rental values of Grade B properties.
How to interpret the signals from share prices?
From an analysis of data about prevailing prices, KREIT and CCT are indicating that rents will grow moderately, which aligns with our own assumptions of low to mid single-digit growth expectations. Data models from Suntec however indicate that there may be at least another 20% raise in rents, even with their huge exposure to older office properties.
Grade A is the preferred exposure to have.
We maintain a rating of NEUTRAL on both KREIT and CCT, largely due to their larger exposure to Grade A office properties, while our UNDERPERFORM rating for Suntec is primarily driven by the fact that they have significant exposure to office properties that are of an older vintage, for which we hold a negative sentiment. The c.5% yield offered is the main risk to our forecast, which could deliver some protection on the downside.