Office REITs – CIMB

Office REITs: Picking a bottom

We believe that the office sector is approaching the end of a de-rating cycle. Leasing momentum appears to be picking up,while threats of asset devaluations have subsided. With the stocks trading at 0.6-0.8xP/BV, we think risk-reward favours a positioning for a bottom.

We are Overweight on office S-REITs, tweak DPUs and up our DDM-based target prices on lower risk premiums and discount rates. We upgrade Suntec REIT to Outperform from Trading Buy while keeping other recommendations unchanged. Our top office picks are CCT and Suntec REIT.

Office rents could bottom soon

We believe that the office sector is approaching the end of a de-rating cycle. Average rents are now back at 2Q09 levels, around the period of the global financial crisis. Grade-A rents are still 42-48% below their previous peak in 2008, and below their 15-year mid-cycle average of S$10.50-11 psf.

Rents find support

Leasing momentum, while still slower than in 2011, appears to have been picking up recently. Super-Grade-A rents appear to be supported at S$10-12psf while office players indicate that deals are still being done at S$8.50-10psf for prime office space in the CBD. Occupancy/ pre-commitments for new major office buildings delivered have so far exceeded 70%. We believe rental expectations will progressively rise when occupancy hits >80%.

Office REITs DPUs well supported

DPUs for office S-REITs look well-supported given low lease expiries for 2012 (1-10% of overall NLA), low expiring rents locked in 2009 and high overall occupancy of >96%. We expect positive rental reversions to resume in 2013.

Stock picks

Trading at 0.6-0.8x P/BV and forward yields of 6-8%, we think risk-reward favours a positioning for a bottom. Our top office picks are CCT and Suntec REIT. We like CCT for its stronger balance sheet and potential upside from its 60% share in Raffles City. We also like Suntec REIT for its cheap valuations of 0.6x P/BV and potential upside on renewals at Suntec City office.