Cyclical Recovery

Office S-REITs Set For Cyclical Recovery

SINGAPORE – DBS Group Research is advising investors to “stay with office winners” as Singapore real estate investment trusts (S-REITs) specialising on office properties appear poised for a cyclical recovery, reported The Business Times on Thursday morning (10 December).

Moreover, DBS analysts Derek Tan and Rachel Tan said in a report that the oversupply of office space due to the prevalence of working from home is expected to be offset by the dearth in new office stock and the recovery in Singapore’s economy.

The market watchers noted that office S-REITs are still appealing as they’re changing hands at the industry’s historical average of 0.9-times price to net asset value (P/NAV), and the COVID-19 vaccine will be administered soon.

“With a vaccine now within sight, we believe a return to normalcy would be the catalyst to drive office S-REIT’s unit prices towards 1.1-times P/NAV, or one standard deviation above their historical average,” they explained.

As Singapore’s economy is recovering from the health crisis, coupled with the close correlation between economic growth, office space demand, and the performance of S-REIT unit prices, DBS believes that the office sector will likely see a reversal from being market laggards currently into market leaders by 2021.

Generally, unit prices of S-REITs have recovered roughly 40 percent from their lows in March, but office S-REITs have just recovered 30 percent of their unit prices, lagging their other counterparts like hotels and industrial properties. Therefore, there’s still more room for growth, and office S-REITs present a chance for investors to ride the wave of recovery into 2021, DBS pointed out.

Meanwhile, DBS revealed that the level of adoption of hybrid work arrangement post-COVID-19 will differ based on industry and role.

The Tan duo said financial firms and insurance providers, which lease nearly 40 percent of the overall office space in Singapore’s central business district (CBD), could surrender the most office space versus other industries.

In addition, the office space reduction by industries most affected by the pandemic could drag down net demand for CBD office space. These sectors like retail, F&B, and energy firms account for around 20 percent of office premises in the CBD.

Based on DBS’s base-case scenario analysis, negative net absorption could reach some 1.1 million sq ft, which would lead to shadow office space and vacancies over the coming year. In turn, office vacancy levels in the CBD could rise from 12 percent currently to 14 percent.
Still, this could be mitigated by good economic and employment figures, noted DBS, adding that the limited new inventory of office space could avert sharp rental declines, as merely 167,000 sq ft of net office stock would enter the market in 2020 to 2022.

As businesses need to comply with social-distancing rules, office space requirement per worker is expected to rise by 25 percent to 100 percent, DBS calculated.

Altogether, these factors are expected to lead to a break-even net demand for office space, it said, adding that Grade A offices with eco-friendly features will continue to lure tenants.

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