March 05, 2014 Singapore SECTOR RESEARCH | SEE PAGE 14 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Office REITs NEUTRAL (unchanged) Big supply leaves rents in limbo The key to rental rate increase in the Central Area lies in continued hiring in the financial, insurance and business services sectors. But an uptick in headcount is unlikely this year, considering sub-trend GDP growth, sluggish financial services activities, lower hiring expectations and tightening labour market Short-term reprieve next year but ample supply still looms. With vacancy rate tipped to rise in 2016, we see modest rental upticks of 3%/5% in FY14/15 before sliding 2% in 2016. What’s New The office REITs segment was recently abuzz with renewed interest from investors after the Urban Redevelopment Authority’s Office Property Rental Index recorded a ~1% YoY increase in rent for both the Central Area and Central Region in both 3Q13 and 4Q13. The uptick came on the back of four consecutive quarters of YoY decline since 3Q12. What’s Our View Abundant supply a nagging worry. While we anticipate a reprieve from new office space next year, the fact remains that there is still ample supply – an estimated 6.4m sq ft of net leasable area in the Central Business District (CBD) is expected to come on-stream in 2014-2017. With the labour market moderating and overall hiring expectations on the wane, we do not think headcount numbers will jump sharply this year, especially considering the sub-trend GDP growth and financial services activities remaining sluggish. We estimate net absorption during this year and next would balance out previous outstanding (~4.8m sq ft in the Central Area) and new incoming supplies, leading to an occupancy rate of 90-92% in the Downtown Core (4Q13: 90%). However, in 2016-2017, occupancy rate could slide to 88-90% as ~5m sq ft of new office space becomes available. Maintain Neutral. With vacancy rate tipped to creep up only in 2016, we see rents rising a modest 3% in 2014 and 5% in 2015 before declining 2% in 2016. We maintain our Neutral stance on the office REITs sector, with HOLD calls on CapitaCommercial Trust (CCT, TP SGD1.50) and Keppel REIT (KREIT, TP SGD1.25). The key downside risk to our call is an abrupt capital flight from Asia. Liquidity outflows will not only hit asset prices sorely, but may also lead to a cutback in headcount for the financial, insurance and business sectors, causing a dent in rentals. Analyst Ong Kian Lin (65) 6432 1470 [email protected]MBKE Office REITs coverage Price* TP Upside DPU yield (%) Price/DPU (x) P/BV (x) Rating (SGD) (SGD) (%) FY14E FY15E FY14E FY15E FY14E FY15E CapitaCommercial Trust HOLD 1.465 1.50 2.4 5.5 5.9 18 17 0.88 0.90 Keppel REIT HOLD 1.175 1.25 6.4 6.8 6.8 15 15 0.94 0.96 *Closing price as of 28 Feb 2014. Source: Maybank KE, Bloomberg
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March 05, 2014
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SEE PAGE 14 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
Office REITs NEUTRAL (unchanged)
Big supply leaves rents in limbo The key to rental rate increase in the Central Area lies in
continued hiring in the financial, insurance and business services sectors.
But an uptick in headcount is unlikely this year, considering sub-trend GDP growth, sluggish financial services activities, lower hiring expectations and tightening labour market
Short-term reprieve next year but ample supply still looms. With vacancy rate tipped to rise in 2016, we see modest rental upticks of 3%/5% in FY14/15 before sliding 2% in 2016.
What’s New The office REITs segment was recently abuzz with renewed interest from investors after the Urban Redevelopment Authority’s Office Property Rental Index recorded a ~1% YoY increase in rent for both the Central Area and Central Region in both 3Q13 and 4Q13. The uptick came on the back of four consecutive quarters of YoY decline since 3Q12.
What’s Our View Abundant supply a nagging worry. While we anticipate a reprieve from new office space next year, the fact remains that there is still ample supply – an estimated 6.4m sq ft of net leasable area in the Central Business District (CBD) is expected to come on-stream in 2014-2017. With the labour market moderating and overall hiring expectations on the wane, we do not think headcount numbers will jump sharply this year, especially considering the sub-trend GDP growth and financial services activities remaining sluggish. We estimate net absorption during this year and next would balance out previous outstanding (~4.8m sq ft in the Central Area) and new incoming supplies, leading to an occupancy rate of 90-92% in the Downtown Core (4Q13: 90%). However, in 2016-2017, occupancy rate could slide to 88-90% as ~5m sq ft of new office space becomes available.
Maintain Neutral. With vacancy rate tipped to creep up only in 2016, we see rents rising a modest 3% in 2014 and 5% in 2015 before declining 2% in 2016. We maintain our Neutral stance on the office REITs sector, with HOLD calls on CapitaCommercial Trust (CCT, TP SGD1.50) and Keppel REIT (KREIT, TP SGD1.25). The key downside risk to our call is an abrupt capital flight from Asia. Liquidity outflows will not only hit asset prices sorely, but may also lead to a cutback in headcount for the financial, insurance and business sectors, causing a dent in rentals.
An overview Rents edge up, optimism rekindled. The office REITs segment was recently abuzz with renewed interest from investors after the Urban Redevelopment Authority’s (URA) Office Property Rental Index recorded a ~1% YoY rise in rent for the Central Area and Central Region in both 3Q13 and 4Q13. The uptick came after four consecutive quarters of YoY decline.
Figure 7: Office property price growth (YoY %) Property price growth has slowed since 2Q13 when QE taper talk began
Figure 8: Office rental growth (YoY %) Office rentals have started to turn around since 3Q13
Source: URA Source: URA
Temporary shortage boosts near-term optimism. We attribute the rental rate rise to slower office completions in 2013, with Asia Square Tower 2 (780k sq ft of net lettable area or NLA) being the only development in the Central Area to obtain a Temporary Occupation Permit (TOP) in 3Q13. This came almost more than a year after the last major Grade A office buildings were completed, namely, One Raffles Place Tower 2 (TOP: 2Q-3Q12) and Marina Bay Financial Centre (MBFC) Tower 3 (TOP: 1Q12). Since early 2013, office landlords have taken advantage of the relative lack of new supply to hold rents steady, with leasing activities for the most part driven by small-space occupiers from the energy and commodities, professional services and IT sectors. Demand from large-space occupiers was more muted as the financial sector kept a tight lid on costs. This in turn helped Grade A completions such as MBFC Tower 3 and Asia Square Tower 1 to progressively fill up to over 90% occupancy rate. Booking.com, for example, took up 45k sq ft recently at MBFC Tower 3. Asia Square Tower 2 is also 60% filled to date, with Mizuho Bank and Allianz as the anchor tenants alongside other tenants such as Swiss Re, National Australia Bank and Nikko Asset Management. One Raffles Place Tower 2 also achieved ~80% occupancy as of 4Q13. Figure 10 illustrates the existing tenants of these completed Grade A office developments.
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Singapore Office REITs
Figure 9: Recent leasing transactions Property Location Tenant Remarks Asia Square Tower 2 Marina Bay Mizuho Bank Leased ~100k sq ft. Shifted from Capital Tower Asia Square Tower 2 Marina Bay National Australia Bank Shifted from Suntec City Asia Square Tower 2 Marina Bay PT Bank Mandiri Shifted from Springleaf Tower Asia Square Tower 2 Marina Bay Citco Leased ~11k sq ft Marina Bay Financial Tower 3 Marina Bay Booking.com Leased ~45k sq ft Marina Bay Financial Tower 3 Marina Bay Gunvor Leased ~22k sq ft. Shifted from Maybank Tower Marina Bay Financial Tower 3 Marina Bay Nabarro Shifted from Singapore Land Tower South Beach Tower Beach Road Rabobank Leased ~30k sq ft. Moving from 77 Robinson Road PWC Building Raffles Place Tripadvisor Ocean Financial Centre Raffles Place Olswang Asia Ocean Financial Centre Raffles Place Linc Energy Ocean Financial Centre Raffles Place BGC Group Millenia Tower Temasek Avenue Palo Alto Networks Moving from Suntec City Millenia Tower Temasek Avenue Aisling Analytics Moving from Suntec City Millenia Tower Temasek Avenue Barry Callebaut Cocoa Asia Moving from Suntec City Millenia Tower Temasek Avenue Dymon Asia Capital Moving from Suntec City Keppel Bay Towers Harbourfront Avenue Swatch Moving from Wheelock Place Wheelock Place Orchard Road T. Rowe Price Moving from Paragon 80 Robinson Road Raffles Place Havas Worldwide
Source: Corporate Locations, The Business Times, The Straits Times
Figure 10: Existing tenants at selected properties as of 17 Feb 2014 site inspection MBFC Tower 3 (~90%) Asia Square Tower 1 (~90%) Asia Square Tower 2 (~60%) ORP Tower 2 (~80%) Ocean Financial Centre (100%) Aryzta Asia Pacific ADS Securities Allianz ADC International Far East Pte Ltd ABN AMRO Bank Ashurst LLP Asia Square Management Office Euler Hermes Aegis Media Asia Pacific Addleshaw Goddard LLP Bank of Montreal Asia Square Show Suite Citco Gateway Akamai Technologies APJ Pte Ltd Allegro Development Asia Pte Ltd Berge Bulk Allied World Assurance JustOffice Akamai Technologies Singapore Pte Ltd Anglo American Booking.com Amobee TransRe AXA Asia Regional Centre Pte Ltd Australia and New Zealand Banking Grp Clearlake Shipping Pte Ltd Bank J. Safra Sarasin Gulfstream BDO Unibank Inc Representative Office Bestor Investers Pte Ltd Clifford Capital Pte Ltd Bank Julius Baer Mercuria Energy Trading Borrelli Walsh Pte Ltd BNP Paribas Clifford Chance BG Group Mizuho Bank Canadian Imperial Bank of Commerce CBRE Global Investors (Singapore) Pte Ltd Clyde & Co Clasis Singapore Pte Ltd BlackRock Mundipharmal Pte Limited CCI CBRE GMM Asia Pacific Fund Management Credit Industriel et Commercial Bumi Hasta Mukti National Australia Bank China Merchants Bank Co Ltd Consulate of the Republic of Cyprus DBS CTBC Bank Platinum Equity Advisers International Christie Corporate Services Pte Ltd Dentons UKMEA LLP Endurance Specialty Insurance Ltd Citi PT Bank Mandiri (Persero) Tbk CHS Singapore Trading Company Pte Ltd Digital Realty Enso Singapore Pte Ltd China CITIC Bank International Mandiri Investment Management Chubu Energy Trading Singapore Pte Ltd Dolby Singapore Pte Ltd Evercore Asia (Singapore) Pte Ltd Dimensional Fund Advisors PT Mandiri Sekuritas Dolphin Capital Asia Pte Ltd Drew & Napier LLC Fitness First Platinum E.SUN Bank Scor Services Asia-Pacific EDF Trading Singapore Pte Ltd Drewcorp Services Pte Ltd Geo Energy Resources Limited Edrington Singapore Swiss Re Global Ore Pte Ltd DT Group Goldin Group (Investment) Pte Ltd Fidelity Worldwide Investment iProspect Enerfo Pte Ltd Gunvor Singapore Pte Ltd Flow Traders Asia Kumiai Navigation (Pte) Ltd Freshfields Bruckhaus Deringer Kimberly-Clark Asia Pacific GDF SUEZ Trading Majestic Rock Resources Group Pte Ltd Fundsupermart.com LEGO Singapore Pte Ltd General Atlantic Michael Page International Pte Ltd Gazprom Marketing & Trading Singapore Louis Dreyfus Commodities Asia Pte Ltd GMG Global Miller Insurance Services (Singapore) Pte Ltd Hanergy Global Investment and Sales Lynx Energy Group Google Asia Pacific Mubadala Petroleum (SE Asia) Ltd iFast Corporation Pte Ltd M&A Development Pte Ltd Hontop Energy Phorm Singapore Pte Ltd iFast Financial Pte Ltd McGraw Hill Financial IHS Posterscope Impala NEMS Mead Johnson Nutrition (Asia Pacific) Pte Ltd ILFC Pramerica Real Estate Investors (Asia) Pte Ltd K&L Gates LLP Milbank, Tweed, Hadley & McCloy LLP Intermediate Capital Group Pramerica Financial Asia HQ Pte Ltd Klako Group Nabarro LLP Jump Trading Pacific Prologis Singapore Pte Ltd Lee & Lee (Dental Surgeons) Pte Ltd Pavilion Energy Pte Ltd/Pavilion Gas Pte Ltd KKR Regus Business Centres Looi Teck Kheong (A Law Firm) Regus Management Singapore Pte Ltd Lloyd's Asia Rock Capital Management Pte Ltd Loomis Sayles Investments Asia Pte Ltd Rio Tinto Group Liberty Commodities Asia Smile Inc Dental Surgeons Pte Ltd Luxe Real Estate Simmons & Simmons/TMI Associates Materials Industry And Trade Triumph Global Pte Ltd Mandiri Investment Management Pte Ltd Software AG Marsh & McLennan Companies Tshin Boto Pte Ltd Matson, Driscoll & Damico Pte Ltd The Islamic Bank of Asia Marex Spectron Asia TUS Isobar Neuberger Berman Sinapore Pte Ltd The Norinchukin Bank, Singapore Branch MP & Silva Uttam International Pte Ltd NGAM Singapore Trammo Pte Ltd/Trammo Navigation Pte Ltd OpenLink Financial Vizeum Nigel Frank International UnionPay International, SEA Pure Group Ocean Properties LLP Wong Partnership LLP Putnam Investments Oiswang Asia LLP Woori I&S Asia Pte Ltd/Woori Absolute Raffles Medical OSK|DMG DMG & Partners Securities Yamai Trade Pte Ltd Regus OSK International Asset Management Reynolds Porter Chamberlain LLP Reed Smith Pte Ltd Re Suisse Financial Services SBICAPS Royal Bank of Canada Spencer Stuart Sinochem International Squire Sanders (Singapore) LLP Source Profit Stamford Law SWIFT Stone Chambers Singapore Swiss National Bank Su E-min & Co (Singapore) Pte Wanxiang Resources The Abraaj Group White & Case The Croesus Group Wirecard Asia The Executive Centre XL Group Trafigura Pte Ltd True Yoga V-cube Global Services Pte Ltd Verdant Capital Management Pte Ltd Verizon Wexford Connelly Pte Ltd YKVN LLP Zafferano Note: Number within brackets denotes occupancy rate Source: Maybank KE, Companies
March 05, 2014 5
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But main demand drivers sorely lacking. Based on the statistics released by the Ministry of Trade and Industry, Singapore’s GDP grew 4.1% YoY in 2013 and is expected to remain on track at 2-4% in 2014. Business expectations improved marginally between 4Q12 and 3Q131, giving spot rents a fillip in 2013. Nonetheless, local and regional economic growth remains challenging and expectations for 2014 may have to be moderated, in our view. The latest 4Q13 Business Expectations Survey, conducted by the Ministry of Trade and Industry from Sep 2013 to mid-Oct 2013, painted a deterioration in business outlook for Jan-Jun 2014. It showed that a net weighted balance of 1% of firms is optimistic about business prospects for the six-month period ending Jun 2014. The magnitude of the positive net weighted balance recorded for Jan-Jun 2014 is considerably lower than for Oct 2013-Mar 2014 in the previous quarter’s survey when the positive net weighted balance was 8%.
Who holds the key to rental rate increase? To determine the drivers for office demand and hence, rental growth, we examine Singapore’s GDP growth figures for the past two decades and job creation statistics at key service industries such as information and communications, real estate services, financial and insurance, and business services. Our findings show that the correlation with GDP growth is not as robust as with headcount changes in employment services. One reason could be the GDP numbers are not as direct and more often than not skewed by the volatile biomedical output. In particular, our study shows that rental growth in the Central Area exhibits a strong relationship with headcount additions in both the financial and insurance services and business services, with a whopping 76% correlation based on their combined employee net additions between 1Q04 and 4Q13. The impact from the information and communications, real estate, professional and administrative and support services remains modest at best, suggesting that the financial and business services sectors remain key in uplifting rentals in the Central Area.
Figure 11: Central Area rental growth has only a 19% correlation with GDP growth…
Figure 12: …but a 76% correlation with headcount growth in the financial, insurance and business services sectors
(32)(24)(16)(8)0816243240485664
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1 The net weighted balance of firms in the service sector expecting positive business prospects in the next six months increased progressively from +1% in 4Q12 to +8% in 3Q13.
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Figure 13: Correlation of Central Area YoY rental growth vis-à-vis different service sectors
Employee net additions Correlation with rental growth
(% YoY)
Overall Services Sector 68
Information & Communications 26
Financial & Insurance Services 66
Business Services 68
Financial, Insurance and Biz Services 76
Real Estate Services 8
Administrative & Support Services -18
Community, Social & Personal Services 17
Note: The correlation data is derived based on data from 1Q04 to 4Q13 Source: URA, CEIC
Hiring expectations on the wane ‘Intention to hire’ decrease. According to leading recruitment agency Hudson, Singapore’s labour market is expected to tighten this year with overall hiring expectations down in 1Q14 2 compared with the previous quarter. It marks the second consecutive quarter of a decrease in “intention to hire” for almost all industries. The exception was the banking and financial services sector, which has seen a 7.4ppt QoQ increase in positive hiring intentions to 50%. Positive hiring intentions in this sector have risen for over three consecutive quarters, thanks to increasing confidence in Singapore as an offshore trading centre for the Chinese yuan following the two countries’ decision to trade currencies directly. Hudson sees heightened demand for risk and compliance professionals, especially those with the right skill set as well as local market knowledge and experience. Nonetheless, the recent announcements by Barclays and Royal Bank of Scotland to cut their global workforce by 12,000 and 30,000, respectively, continue to cast a shadow on hiring prospects for investment banking professionals. We note that net job creations in the financial and insurance services sector bottomed out in 2Q13, with the numbers still below the 2007 and 2010 peak levels. Nonetheless, we do not expect a sharp rise in employment figures, given the sub-trend GDP growth and unlikely pick-up in financial services activities in 2014. On the other hand, a bigger slip-up, one that many had feared would follow in the wake of the Global Financial Crisis, did not appear on the cards as well, with stronger growth in the West and China pushing ahead with its structural reforms. Office rentals thus may see modest, if not steady growth this year on account of subdued headcount additions.
2 Employment Trends 1Q2014: Hiring expectations in Singapore edged down 4.3ppts, with 39.5% of employers intending to increase headcount this quarter. Expectations to decrease headcount have gone up 2.9ppts to 7.3%.
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Figure 14: Quarterly net employee additions in financial and insurance services
Net additions to the Financial & Insurance service sector
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Supply dynamics poised to change Near-term positive. In our view, this year and next may be a good, albeit short-lived, period for the office market in terms of supply. The dynamics would change when the 700,000-sq-ft CapitaGreen and 527,000-sq-ft South Beach Development are completed in 4Q14. And when both developments commence active marketing nearer their TOP date, it may lead to further downward pressure on office rentals. Figure 15: Known office supply pipeline in the Central Business District
Figure 16: URA’s demarcation of Central Area/Central Region and Fringe Area
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Competition from decentralised developments. Also not to be ignored is the impact of office supply from Outside Central Region (OCR) on CBD rentals. We cannot rule out the possibility of high-quality decentralised developments like Westgate Tower in Jurong, Mapletree Business City Phase 1 at Pasir Panjang Road and The Metropolis at Buona Vista drawing tenants (albeit smaller floor-plate at times) away from CBD office buildings. Already, Mapletree Business City has attracted big names such as Deutsche Bank, HSBC, Credit Agricole, Unilever, Nike, Toshiba and Samsung Asia, while potential tenants at The Metropolis include Shell, NOL, Procter & Gamble and GlaxoSmithKline. And within the CBD, a hollowing out could occur when tenants exit buildings earmarked for en bloc redevelopment (possibly The Arcade at Raffles Place in the near term), sparking further substantial declines in Grade B office rentals. Figure 17 highlights some of the decentralised developments scheduled for completion in 2014-2017.
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Figure 17: New completions (including relevant business parks) in Outside Central Region in 2014-2017 Expected completion Proposed project Developer Location NLA (sq ft) 2014 Westgate Tower CapitaLand Western suburbs 306,400
2014 Paya Lebar Square
Guthrie, Siong Feng Development and Sun Venture Commercial
Paya Lebar Road
430,000
2015 Galaxis Ascendas Fusion 5 Pte Ltd West 43,055 2015 Futuris/ Synthesis/ Kinesis JTC Corporation One North 99,000 2015 Centropod @ Changi Roxy Pacific Changi Road 53,700
2015 Mediapolis
Ascendas Land (Singapore)
One North (Portsdown Road, Mediapolis)
584,270
2016 Mapletree Business City Phase 2 Mapletree Alexandra Road 1,120,000 2017 Site at Venture Avenue Sim Lian Jurong Gateway 500,000
Total 3,136,425
Source: CBRE, Maybank KE
Medium term: Still limited upside for office REITS. Currently, the known pipeline of Central Area private office space in 2014-2017 consists of 6.4m sq ft of net lettable area, which is a significant 13% of the total private office stock in the Central Area as of 4Q13. This figure is almost identical to the ~6.8m sq ft of new completions which came on-stream in 2010-2013. We note that it took a good 3-4 years for office supply in the Downtown Core (including Downtown@Marina Bay) to be absorbed. With a similar onslaught in 2014-2017, we expect rentals to remain under pressure. In short, there appears to be limited upside for office REITS from a rental reversion perspective.
Figure 18: Office completions in the Central Area in 2010-2013 totalled ~6.8m sq ft Completion date Project Developer/Owner Location Occupancy (%) NLA (sq ft) 2010
Marina Bay Financial Centre Towers 1-2 (Phase 1)
Central Boulevard Development Pte Ltd
Marina Boulevard
100 1,652,667
2010 Tokio Marine Centre TM Asia Insurance McCallum Street NA 114,000
2010 50 North Canal Road Maybank North Bridge Road 100 50,000
2011 Ocean Financial Centre (OFC) Keppel Land Collyer Quay 100 885,450
2012 1 Raffles Place (Tower 2) OUB Centre Ltd Raffles Place ~80 350,000
2013 Asia Square Tower 2 MGPA Marina View ~60 782,000
Total 6,846,792
Source: CBRE, URA, Maybank KE
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Figure 19: Schedule of new office completions in the Central Area in 2014-2017 Expected completion Proposed project Developer Location NLA (sq ft) 1Q14 Orchardgateway (office component) United Engineers Orchard Road 37,000 4Q14
CapitaGreen
CapitaLand, CCT and Mitsubishi Estate Asia
Raffles Place
700,000
4Q14 South Beach Development CDL, IOI Beach Rd/City Hall 527,450 4Q15 PS 100 (strata titled) Far East Organization Tanjong Pagar 70,650 2015 EON Shenton 70 Shenton Pte Ltd Shenton Way 101,045 2016 Marina One M+S Pte Ltd Marina Bay 1,880,000 2016 Duo M+S Pte Ltd Beach Rd/City Hall 570,000 2016 Guoco Tower GuocoLand Tanjong Pagar 850,000
2016 Redevelopment of International Factors Building and Robinson Towers
Tuan Sing
Robinson Road
215,280
2016 V on Shenton UIC Land Shenton Way 290,000 2016 Robinson Square (strata titled) Oxley Holdings Robinson Road 38,642 2017 Index - SBF Centre (strata titled) FEO Robinson Road 353,480 2017 Oxley Tower Oxley Holdings Robinson Road 111,439
2017 Cecil Street/Telok Ayer Street F&N Tanjong Pagar 720,000
Total 6,464,986
Note: Red box denotes substantial NLA completions Source: CBRE, URA, Maybank KE
On an annualised basis, annual net supply in the Downtown Core area over 2009-2013 averaged 1.2m sq ft while net absorption averaged 1.0m sq ft pa. With ~6m sq ft of new office space coming into the market over 2014-2017, this equates to approximately 1.6m sq ft of supply pa, hardly a trivial number in our view.
Figure 20: Average annual net supply and absorption for Downtown Core
There were only two occasions when average demand in the Downtown Core area exceeded 1.6 m sq ft pa – in 2000 and 2011 (Figure 21). The first was due to a pick-up in demand following the 1997-1998 Asian Financial Crisis and the second could be attributed to the attendant slack take-up post GFC. These two periods were then followed by years of diminishing demand as the previous outstanding supply was absorbed by the market. We do not expect annual demand in 2014 to surpass those levels, and the progressive supply (1.2m sq ft alone this year) and accompanying forward leasing activities (typically 6-9 months ahead of TOP) are also likely to put a lid on any significant rental upside.
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Figure 21: Downtown Core annual net supply and absorption vs occupancy rate
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Long term: More office space sprouting up. Based on the URA Draft Master Plan 2013 released last November, Marina Bay will offer at least another 1m sq m (10.7m sq ft) of office space within the Central Area in addition to the 4.6 m sq m (49.4m sq ft) already available. In particular, new office space will sprout up on the belt along Bayfront Avenue, which stretches from Marina Bay Sands to Marina Bay Station Square. We view this upcoming supply as an overhang on office REITs, diminishing the prospects for a sustained spike in office demand in the CBD area.
Lofty capital values likely to hold up According to the URA, office prices in the Central Area have increased by 46% over 2010-2013 in the aftermath of the GFC and are currently 10.6% above the 2008 peak levels. But they still pale in comparison with prices in the industrial warehouse segment, which have shot up a whopping 115% over the same period and are currently 71% above the 2008 peak levels.
Based on property consultancy CBRE’s records, cap rates of Grade A office space have also come off from a peak of 6.6% in 3Q08 to a trough of 3.71% in 1Q-3Q13 on the back of yield compression. Cap rates have bottomed out to 3.8% in 4Q13. We do not think there will be further compression and cap rates will remain at ~4% levels in 2014-2016.
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Investment theme for office REITs Reiterate HOLD on CCT, KREIT. We see net absorption in 2014-2015 mostly balancing out previous outstanding and new incoming supplies, resulting in an occupancy rate of 90-92% for the Downtown Core area (4Q13: 90%). Come 2016-2017 however, we expect occupancy rate to slide to 88-90% as ~5m sq ft of new office space comes on-stream.
With vacancy rate tipped to rise only in 2016, we see rents edging up a modest 3% in 2014 and 5% in 2015 before declining 2% in 2016. We also expect capital values to hold up at SGD2,424 psf in 2014 and SGD2,472 psf in 2015 (2013: SGD2,400 psf) before softening to SGD2,448 psf in 2016 with the onslaught of 3.84m sq ft of new office supply in that year.
CapitaCommercial Trust (CCT) and Keppel REIT (KREIT) have all their Singapore properties in the Central Area, amounting to, respectively, 2.9m sq ft and 2.4 m sq ft of attributable net leasable office area. In terms of AUM, the Singapore assets constitute 100% of CCT’s and 88% of KREIT’s investment properties. (KREIT also has five Australian properties.) We reiterate our Neutral stance on the office REITs sector, with HOLD calls on CCT (TP SGD1.50) and KREIT (TP SGD1.25).
Figure 22: CCT – breakdown of portfolio value Figure 23: KREIT – breakdown of portfolio value
Twenty Anson6%
One George Street13%
Raffles City25%
Capital Tower18%
Six Battery Road18%
HSBC Building6%
CapitaGreen8%
Golden Shoe2%
Bugis Vil lage1%
Wilkie Edge3%
c
Bugis Junction7%
One Raffles Quay17%
Prudential Tower7%
Ocean Financial Centre
35%
MBFC Phase 122%
Australian Properties
12%
Source: Company Source: Company
Figure 24: Rental and capital value assumptions 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
What could make us wrong? Our view is premised on the assumption that the US Federal Reserve will continue to progressively taper its USD65b-a-month quantitative easing programme, completing the stimulus withdrawal by year-end, after another seven rounds of FOMC meetings in 2014. A sudden and complete withdrawal may lead to an abrupt capital flight from Asia and have a negative impact on asset prices in Singapore (property-led price declines as liquidity flows out of the city-state), thus challenging our Neutral call on the office REITs sector. Conversely, should the Fed taper at a slower rate than expected, or reverse course and increase its US securities purchases, then liquidity could easily flow back to Singapore and lift asset prices once more.
On the office front, a capital flight from Asia or ASEAN may also lead to a cutback in headcount for the financial, insurance and business services sectors. Singapore’s status as a regional financial centre makes it especially vulnerable to external shocks and financial contagion. If job cuts and layoffs occur, there would be further downward pressure on office rents, on top of the anticipated ~6.4m sq ft of new supply in the Central Area in 2014-2017.
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Research Offices
REGIONAL
WONG Chew Hann, CA Regional Head of Institutional Research (603) 2297 8686 [email protected]
ONG Seng Yeow Regional Head of Retail Research (65) 6432 1453 [email protected]
Alexander GARTHOFF Institutional Product Manager (852) 2268 0638 [email protected]
NGUYEN Thi Sony Tra Mi (84) 8 44 555 888 x 8084 [email protected] • Port operation • Pharmaceutical • Food & Beverage
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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES
DISCLAIMERS
This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.
This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.
MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report.
This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect.
This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.
Malaysia
Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.
Singapore
This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.
Thailand
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.
Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect.
US
This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations.
UK
This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.
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Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.
Singapore: As of 5 March 2014, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.
Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.
Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
As of 5 March 2014, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.
MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.
OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.
No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.
Ong Seng Yeow | Executive Director, Maybank Kim Eng Research
Definition of Ratings
Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends)
Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
DISCLOSURES Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities Limited (License Number: 117/GP-UBCK) is licensed under the State Securities Commission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.
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Malaysia Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194
Singapore Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003
London Maybank Kim Eng Securities (London) Ltd 6/F, 20 St. Dunstan’s Hill London EC3R 8HY, UK Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674
New York Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500
Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136
Hong Kong Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104
Indonesia PT Maybank Kim Eng Securities Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189
India Kim Eng Securities India Pvt Ltd 2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91).22.6623.2600 Fax: (91).22.6623.2604
Philippines Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738
Thailand Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)
Vietnam Maybank Kim Eng Securities Limited 4A-15+16 Floor Vincom Center Dong Khoi, 72 Le Thanh Ton St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 8 38 271 030
Saudi Arabia In association with Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787
South Asia Sales Trading Kevin FOY [email protected] Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447
North Asia Sales Trading Alex TSUN [email protected] Tel: (852) 2268 0228 US Toll Free: 1 877 837 7635
