AREIT – UOBKH
Riding on increasing demand for suburban office space
Benefiting from strong demand for suburban office space. The shortage of office space within the Central Business District has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Changi Business Park. A-REIT has benefitted as Business & Science Park accounted for 25% of its portfolio by property value. Occupancy rate for Business & Science Park has increased from 92.4% at Mar 07 to 97.0% at Mar 08. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
Developing built-to-suit offices at suburban locations. A-REIT is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities, which will house its international technology office supporting its consumer businesses, regional processing centres for securities and funds administration and regional technology infrastructure support. Credit Suisse has also taken up a three-year lease for 26,600sf space at HansaPoint@CBP, a partial build-to-suit sevenstorey business park building completed in 4QFY08.
A-REIT will undertake more development projects on a built-to-suit basis. Management has submitted several proposals for requests from financial institutions and IT service companies. Sponsor Ascendas is developing a purpose built nine-storey operations hub with gross floor area of 500,000sf at Changi Business Park for DBS Bank. Ascendas is also developing similar facilities for Standard Chartered for up to 225,000sf at the initial phase. These assets would eventually be injected into A-REIT.
Acquisition of 31 International Business Park. A-REIT has entered into a put and call agreement with Creative Technology to acquire 31 International Business Park for S$246.8m. Creative will leaseback the building with NLA of 541,300sf for five years with options to renew for another 3 + 2 years, providing net property yield of 6.24% for the initial five years. Creative will provide cash security deposit of S$72.2m. The acquisition will increase A-REIT’s exposure to Business & Science Park from 25% to 29%.
A well diversified portfolio. A-REIT has a portfolio of 84 properties and total assets of S$4.2b at Mar 08. The weighted average lease to expiry is 5.9 years. It has a well diversified tenant base of over 790 international and local companies. The top 10 tenants accounted for 27.9% of portfolio income. The largest tenant Singtel accounted for only 6.5% of portfolio income. Tenants for sales & leaseback properties have to provide security deposits of 12 months. A-REIT’s weighted average funding cost is 3.1% due to its corporate rating of A3 and consistent track record. It will be concluding a three-year S$200m transferable loan facility, after which the earliest date for refinancing is Aug 09.
Maintain BUY. Management sees opportunity to invest S$500m p.a. in Singapore through acquisitions and development projects till 2010 before shifting its focus to overseas markets (Malaysia, Vietnam and Philippines). A-REIT provides FY08 distribution yield of 6.54%. We have raised our target price to S$3.22 after factoring in the acquisition of 31 International Business Park and the three development projects at Pioneer Walk, Changi LogisPark and Changi Business Park.