Grade A office rents decline in Q42011 as office stock climbs

Micro-market’s occupancy rate falls below 90% for first time since Q3 2005

SINGAPORE’S office leasing market buckled in Q4 2011 under the stress of the heightened uncertainties and volatility arising from the debt crisis in the eurozone, said a new report from Colliers International.

According to the property firm, the average monthly gross rents for Grade A office space in the Raffles Place and New Downtown micro-market fell by 4.3 per cent to $10.31 per square foot per month (psf pm) in Q4 2011 – marking the first time rents fell quarter on quarter since the market bottomed out in Q4 2009.

The rental dip was in tandem with a fall in the micro-market’s occupancy rate to below 90 per cent for the first time since Q3 2005. Occupancy eased to 88 per cent from 90.9 per cent in Q3 2011.

Colliers said that the increase in office stock was not met with corresponding new occupier demand as many firms – including major financial institutions and accounting firms – turned cautious about their expansion plans. ‘The demand and supply equilibrium is further tipped with more office tenants relocating or locating some of their operations – including regional functions, back offices and business continuity premises – out of the central business district (CBD),’ noted Calvin Yeo, Colliers’ executive director of office services.

These moves are facilitated by the availability of compelling suburban options in the form of new office and business park developments, which have specifications and amenities similar to Grade A office buildings in the CBD, he added.

Rents in two other Grade A micro-markets also saw corrections in the final quarter of last year. Rents in the Marina and City Hall areas retreated by 2.3 per cent from the previous quarter, while those in Beach Road edged down by 0.8 per cent.

On the whole, average CBD Grade A office rents fell by 1.6 per cent in Q4 2011 to $8.93 psf pm by end-December 2011.

However, Colliers noted that the sales market stirred, underpinned by new launches of strata-titled office projects and the continued low interest rate environment.

Healthy buying momentum in the sales market enabled capital values to hold stable in Q4 2011, despite the softening rental market.

The average capital value of Grade A office space in the Raffles Place and New Downtown micro-market was $2,459 psf in Q4 2011, relatively unchanged from the $2,460 psf recorded in Q3.

However, it is still some 12.6 per cent below its previous peak of $2,814 sq ft in Q3 2008.

For the whole of 2011, the average capital value of Grade A office space in the Raffles Place and New Downtown micro-market grew by a total of 17.8 per cent. Looking ahead, Colliers expects rents to dip further as a large pipeline of around 11 million sq ft of office space is set to come on stream from 2012 to 2016.

‘The large pipeline of office space supply coming on stream from 2012 to 2016 is of concern,’ said Colliers’ director of research & advisory Chia Siew Chuin.

‘The future supply of islandwide office space is forecast to amount to close to 11 million sq ft, which translates to an average 2.2 million sq ft per annum.’

Reits outshine STI; healthcare plays lead

THE majority of Singapore real estate investment trusts (Reits) outperformed the Straits Times Index (STI) last year, data from the Singapore Exchange (SGX) shows.

Of the 22 Reits here, 17 performed better than the benchmark index – which ended down 17 per cent in 2011 – with healthcare-related plays leading the way.

In price performance terms, Parkway Life (PLife) Reit – which holds Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital – floated to the top of the chart with an 8.5 per cent gain in its unit price last year.

PLife Reit said last year that it remained positive on the long-term prospects of the regional healthcare industry, given the rising demand for better-quality private healthcare services that is being driven by growing affluence and a fast-ageing population.

Its sector peer, First Reit, was ranked second, with a price return of 7 per cent.

The remaining 20 Reits, of which 15 did better than the STI, posted negative price returns in 2011.

Top loser was K-Reit Asia, which saw its unit price slump 36.2 per cent. The office property trust underwent a 17-for-20 rights issue to raise about $976 million to fund its purchase of Keppel Land’s controlling stake in Ocean Financial Centre.

The next poorest performer was CapitaCommercial Trust, which ended the year with negative returns of 29.7 per cent.

Taking into account price and dividends, First Reit – Singapore’s first healthcare Reit – provided the highest total return of 16.3 per cent in 2011. PLife Reit was ranked second with 14.4 per cent gains in total return terms.

First Reit offered a dividend yield of 9.3 per cent – the highest among the 22 Reits – while that of PLife Reit was 5.9 per cent.

Others that emerged stronger in total returns include Mapletree Industrial Trust and Cache Logistics, which offered gains of 6.4 per cent and 7 per cent, respectively.

K-Reit Asia was also the biggest loser in total return terms, with a 32.8 per cent drop in returns. It was followed by CapitaCommercial Trust, which registered a 25.9 per cent fall in total return terms.

Stable sector amid market gloom

• Consumers may become more cost conscious

• More resilient non-discretionary spending should support suburban retail sales and rents

• Positive rental reversion and AEI to underpin Retail Reit earnings

• Prefer MCT (TP S$1.09) and CMT (TP S$2.08)

Back to basics. YTD (9M11), retail index excluding motor vehicles sales grew by 8.1% y-o-y, which is a shade below the 2007 peak driven largely by discretionary spending. Looking ahead, we believe consumers may start to tighten their belts amid growing economy uncertainties with early indicators signaling weakening consumer confidence. That said, unemployment at relatively low levels of c2-3%, should help to partly offset the drag and support consumer spending. Hence, malls comprising higher components of supermarket and departmental stores will fare better.

Suburban occupancy and rents show resilience. Occupancy in the retail market is generally higher than office and the multi-factory industrial space as supply activities in the retail sector are less speculative. As evident in 2009, despite economic uncertainties, retailers took up a total of around 1.6 m sq ft of retail space (>3x the long term average) and occupancy dipped only by a marginal 1%pt, hence underlining the resilience of the sector. Within this space, suburban occupancy and rents appeared to be “stickier” than Orchard Road prime space during recessionary periods. In addition, suburban retail space per capita is still under served compared to other major cities and will benefit from the steady population growth.

Earnings underpinned by positive rental reversion and AEI works. During the GFC, we noted that average occupancy rates of the retail reits were high, moving within a tight 1%pt with suburban landlords able to renew rents up. Hence, we believe that rental reversions for retail space will remain positive despite the anticipated slowdown in economy. Earnings growth will also be underpinned by asset enhancement initiatives and asset repositioning moves.

Stock Picks: MCT and CMT. Among the retail landlords, we like MCT as it has the highest proportion of its income up for renewal. We expect healthy positive rental reversion given that the expiring rents were locked in at lower rates. We also like CMT as a market leader in its space. Both MCT and CMT also offer FY11-13F earnings CAGR of c.8%, one of the highest in the Sreit sector.

When the going gets tough, the tough gets going

• Industrial sector to see moderating growth

• Industrial REITs’ long WALE and well diversified portfolio minimize impact on unitholders’ distributions

• Prefer REITs with exposure to the logistics sector – Cache (TP S$1.11) and MLT (TP S$1.07)

No longer a rosy picture. Industrial rents and capital values performed strongly in 2011, with the URA’s reported Multi-User and Warehouse price and rental indices rising by between 16-22% and are currently at multi-year highs. Looking ahead, moderating global PMI figures and slowing manufacturing growth are expected to put a cap on further rental growth, as tenants rationalize their space requirements as production levels fall to below optimal capacity.

Prefer logistics space; rental downside in the multi-user factory, business parks space. We remain optimistic on the outlook of logistics space, which we expect to be most resilient given its limited competitive supply coupled with the fact that demand for warehousing space has historically been the most sticky. The multi-user factory space could see downside due to excess supply entering the market, capping landlords’ ability to continue raising rents. The Business Park space, often seen as an alternative to CBD offices, should see softening rentals due to lower sector occupancy coupled with weakening CBD office rents, and an the influx of new supply in the decentralized office space.

Industrial REITs well diversified and ready to weather the slowdown. Industrial REITs enjoy lower earnings volatility, supported by long term leases for a portion of their portfolios, resulting in longer weighted average lease expiry (WALE), while a diversified tenant portfolio in a myriad variety of trade sectors translates to lower concentration risks. Even after taking into account more moderate rental expectations, impact on S-REITs’ FY12-13F distributions are limited at -0.5-1.7% on our estimates.

Picks: MLT, Cache.
We prefer stocks in the logistics real estate space which should see lower earnings risks. MLT (BUY, TP S$1.07) and Cache (BUY, TP S$1.11) are attractive given their higher than peer average yields of close to 8.0% – 9.0%

CapitaLand plans spin-offs to create two China-listed Reits: CEO

CapitaLand Ltd, South-east Asia’s largest property developer, plans to spin off its developed Chinese projects into two mainland-listed real estate investment trusts (Reits) when China approves listing of Reits, its CEO said yesterday.

Many developers are waiting for China to frame guidelines for the listing of Reits, which is seen as the next stage of development of China’s real estate market.

‘Within the next three to five years, for sure,’ Liew Mun Leong, CapitaLand president and CEO told Reuters in an interview. ‘It’s part of the process of the real estate industry maturing.’

Last month, CapitaLand chief operating officer Lim Ming Yan was quoted as saying the firm is considering spinning off US$5.3 billion of its projects in China into a Reit.

Mr Liew clarified that the divestment plan would involve the China assets held both by CapitaMalls Asia and by CapitaLand. It would see those companies create two Reits listed on the mainland, one focused purely on shopping centres in China and one on mixed-use projects such as its Raffles City developments in Chengdu and Shenzhen.

‘You can have two Reits,’ Mr Liew explained. ‘One is just purely for malls, and then it is very clear where the income stream, and one that is mixed development, with office and retail and residential and malls.’

CapitaLand, which is 41 per cent owned by Singapore investment company Temasek Holdings, is targeting the main ‘gateway cities’ in China: Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu and Chongqing.

CapitaLand will invest at least S$2 billion per year in the mainland, helping the company to increase the portion of its portfolio there to 45 per cent from 36 per cent now, Mr Liew said. ‘I can’t see any market in the world that is better than China for me,’ he said. ‘Our target is 45 per cent maximum of assets in China. I think in five years, we’ll get there.’

As China’s real estate market slows, CapitaLand is eyeing the acquisition of Chinese developers, including H-share and A-share companies listed in Hong Kong. The executive said there will be more opportunity in this downturn because the mainland government will not bail out the real estate industry.

‘Frankly the last global recession, the last financial crisis was too short,’ Mr Liew said. ‘It sounds brutal, but we will have more opportunity if it is not recovering so fast.’

‘There will be a lot of companies that run into difficulties,’ he added. ‘If you have a good candidate, we will look at it quickly.’

The company’s shopping mall arm, CapitaMalls Asia, will sustain its current pace of investment, at S$2 billion over the next 18 months, with 80 per cent of that going to the mainland, Mr Liew said. It will have 100 malls in China within three to five years, he said, up from 56 now.

CapitaLand and CapitaMalls Asia are part of a consortium including a unit of Temasek that will spend 21.1 billion yuan (S$4.2 billion) to develop a mammoth eight-tower riverfront site in Chongqing. — Reuters