DBS Group Upbeat

DBS Group Upbeat On Office S-REITs

SINGAPORE – Analysts at DBS Group Research are confident on the prospects of Singapore-listed real estate investment trusts (S-REITs) that mainly own office properties due to an improving market situation, reported The Edge on Thursday afternoon (14 December, SGT).

The market watchers turned more upbeat on office S-REITs because of the stabilising interest rate environment, the high return to office statistics at over 85 percent, and healthy demand-supply dynamics in the coming years, on top of the overall metrics of positive reversions that’s generating cash flows.

“We believe the scarcity of Grade A Core CBD space will likely persist longer than expected due to the absence of new office sites and removal of offices for redevelopment,” noted the analysts.

“This trend is projected to drive the overall vacancy rate to below 4 percent within the next 2 years (or earlier if demand stems from economic growth). Thus, overall rents could remain steady — a catalyst for the office sector — rather than decline.”

The DBS analysts also think the demand for office space from the finance and insurance sector (the biggest occupant of Singapore CBD offices) has hit rock-bottom already, amidst expectations that the country’s economic growth would improve next year.

Moreover, they said the asset valuation of office S-REITS by year-end could show more resilience as interest rates stabilise. In their stress test analysis, commercial/office S-REITs are likely to maintain their leverage below 45 percent despite a 10 percent fall in portfolio valuation, supported by a robust Singapore asset base.

Consequently, the analysts expect the final overhang would be lifted soon as property values are likely to remain more firm than expected.

“We have factored in higher-for-longer interest rates in our estimates and distribution per units (DPUs) are likely to bottom out in FY2024. We project FY2025 DPU may potentially grow by 3 percent year-on-year,” they added.

In particular, the DBS analysts’ top picks among office S-REITs are Keppel REIT and Mapletree Pan Asia Commercial Trust (MPACT), while OUE Commercial REIT was selected as their mid-capitalisation pick.

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