Office REITs – UOBKH

Positive news from MBFC

There are several positive developments for the office market. Just last month, Commerz Real, subsidiary of Germany-based Commerzbank, bought 71 Robinson Road for a record S$743.8m or S$3,125psf. The latest positive news relates to the new downtown and Marina Bay Financial Centre (MBFC).

Office space at MBFC is well taken up. The strength of the office leasing market can be seen from healthy take-ups at MBFC. Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012 respectively. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Tower 1 with an option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Tower 3 (Phase 2). Other notable financial institutions include Wellington Investment Management, American Express, Barclays and Pictet.

More leases likely to be signed soon. According to industry sources, Standard Chartered and DBS signed at S$8 to S$10psf pm. This is a discounted rental rate due to the huge space taken and the long duration of lease terms exceeding 10 years. Most other tenants signed at between S$12 to S$15psf pm for 3-year leases. Smaller plots were even signed at S$18psf pm. According to industry source, an additional 15% of space at MBFC is in advance stage of negotiation. We see this as an important development. If successfully closed, this will bring the level of commitment at MBFC above 70%, bringing a boost to confidence in the office market. We estimate MBFC accounts for 34% of office supply coming on stream over the next four years.

CapitaCommercial Trust (BUY/S$2.39/Target: S$2.63)
• CCT is well positioned to benefit from positive rental reversion with 29.4% of its leases for office space up for renewal in 2008 and 2009.
• We estimate that the lease for HSBC Building was renewed at an average rental of S$8.50psf pm in early May, much higher than existing passing rent of S$3.63psf pm.
• CCT is the largest office REIT and provides a diversified exposure to the Singapore office market. It provides FY09 distribution yield of 5.66%.

K-REIT Asia (BUY/S$1.45/Target: S$1.81)
• K-REIT achieved average gross rent increase of 14% qoq to S$6.86psf pm in 1Q08 due to positive rental reversion from existing properties and full-quarter contribution from ORQ. It is well positioned to ride the upswing in office rentals with 24.2% of net lettable area (NLA) due for expiry and another 15.5% of NLA due for rent review in 2008 and 2009.
• K-REIT provides attractive 2009 distribution yield of 6.05%. This assumes that the balance of the bridging loan from Kephinance Investment is refinanced at a steep interest rate of 4.2%.

Suntec REIT (BUY/S$1.64/Target: S$2.10)
• Suntec Office Towers achieved committed occupancy of 100% with recent new leases signed at between S$11.50 and S$13.50psf pm. It is well positioned to benefit from positive rental reversion with 9.5% and 44.1% of its leases for office space up for renewal in 2HFY08 and FY09.
• Suntec REIT provides FY09 distribution yield of 6.16%.