DBS Vickers ran a report Sep 2016 on a review of the Office REIT sector. The stabilization of prices looks to be in place.
The first positive sign DBS highlight is that the office REIT looks to be protecting their tenants well. Not many were poached.
The reason could be that, like what Keppel REIT like to remind us, their properties are rather new. And in this case , you do see the advantage, as a company you need to keep up with appearances.
Office Future Supply Snapshot
Majority of the supply coming online will be in 2016 and 2017.
The big ones are Guoco Tower in 2016 and Marina One in 2017.
The last office property to come online will be Frasers Tower by FCL in 2018.
- Jan 10% pre-commited
- Sep 70% pre-commited
- Effective rent reported: $7.50 (near grade B rent) to >$10 psf per month
- Julius Baer 100,000 sqft at >$10 psf per month
The following table shows the recent rental movements:
Republic Plaza seems to be having some problems. They just hemorrhage 240,000 sqft of space
How well Office REITs Manage to Protect Occupancy
Occupancy at the start was not overly high, yet KREIT and Suntec did a great job fulfilling occupancy.
Keppel REIT does have some of the newest properties in the most prime areas, thus their assets are worth the most.
New Office Land Auction to Anchor Future Office Prices
With no new supply after 2018, the auction of Central Boulevard in Marina Bay may let everyone know how much the prime office sector is worth.
The white site allows a maximum floor area of 141,000 sqm GFA with a minimum 100,000 sqm for office space.
The minimum bid is $1540 mil or $1010 psf per plot ratio.
There will come a time in 2020, where we look back and think, maybe it was stupid for us not to pick up some of these REITs at that price.
I just cannot find current yields to be appealing.
What I failed to see is that if, the rents are renewed at $7.5-$8.5 psf per month, and in 2021, when it comes renewal, there isn’t much new supply, a renewal at $11, that is a 30% rental rise.
That does not imply a rise in income available for distribution of 30% in 2021. That will happen if the office REIT’s average rental is $7.5%-$8.5. If this is the case, the office REITs will be trading at much lower valuations compared to now.
The above chart shows the long term price index and rental index of central offices.
Despite what happened in 2009, prices since 2005 have been strong. Still there are big price draw downs.
Another thing I realize is that , the price of the office not always coincide with the office rent.
And since 1989 we have 4 -30% draw downs in rental prices. Prices do not stay constant. They overshoot a lot.
I do expect more rent fights in 2017. With more supply that will always be the case. That -30% draw down might happen again.
However, DBS perhaps might be right. The REIT Manager seem to be getting their shit together when fulfilling occupancy. Lower rent, but occupied is better than not occupied at all.
Lastly, what should we do?
It depends on your strategy. Do you value your time and prefer to buy and hold or do you assess the situation and are speculative over a 1 to 2 year time frame?
What you do will be different.
For both types, pay attention to value. A good judge will be income available for distribution yield or dividend yield versus historical. It gives you an idea how attractive or unattractive in the past.
However, keep in mind to focus on the current versus future income available for distribution. Use history for learning but you are investing for the future. If the average rental of the REITs is around $8 and the future average can be $11, your unappealing 5.5% yield might become 7.5%.
Now you just got to see if the 5.5% is nearer to the bottom or the top.
Just take advantage of lower prices if you think this REIT has a resilient rental profile and don’t buy at too expensive valuations.
If you are buy and hold, assess and don’t get them at too expensive (versus historical for a good manager, good properties).
We will need to make some educated guess that in 2020 what will a conservative rental price to be, and who could take advantage of them.
The more important ingredient is the jobs and economy, as I explained in the 3 most important determinants of REITs future performance. Will Singapore still be a conducive wealth center and regional center?