COMMERCIAL PROPERTY | Staff Reporter, Singapore

REITs defy downturn on tight office supply

CapitaLand, Keppel, and Suntec only have 5% to 1.5% office NLA due for renewals in H2.

The tight office supply in Singapore drove rent prices upwards despite a moderate increase in leases amidst an uncertain macroeconomic outlook, according to a report by UOB Kay Hian.

Despite dampened business sentiment, CapitaLand Commercial Trust (CCT), Keppel REIT (KREIT) and Suntec REIT only have 5%, 1.6% and 1.5% of office net lettable area (NLA) due for renewals in H2, respectively, echoing a strong demand amidst tight supply.

For the second quarter, grade A office rents for core CBD surged 11.9% YoY to $11.30 psf. The strongest increases were recorded at Beach Road/Bugis at 1.7%, attributed to tight vacancy. A total of 1.348 million sqft of net lettable area (NLA) for office space is set to be added by end-2019.

Also read: Vacancy rate of CBD grade A office space fell to 5.6% in Q2

However, UOBKH noted that the sequential increase in rents has moderated to 1.3% QoQ in Q2 from 3.2% QoQ in the first quarter, reflecting a cautious and uncertain macro outlook. In particular, office tenants have chosen instead to renew their existing leases rather than relocate. Additionally, leasing deals are taking a longer time to get concluded as tenants are reluctant to accept landlords’ expectations for higher rentals.

“Business sentiment has been affected by escalation of trade conflicts. Some American and European banks, such as Deutsche Bank, have rightsized their operations to reduce costs,” the report stated.

Also read: Total office supply in CBD to hit 3.3 million sqft by 2022

Of CCT’s 27% NLA office space up for renewal in 2019, 22% had been completed in the first half of the year. Committed rents were at $11.87-13.50 psf for AST2, $12.90-13.20 psf for Six Battery Road and $12.00-13.30 psf for CapitaGreen in Q2. UOBKH expects positive rental reversions for Capital Tower, CapitaGreen and Raffles City in 2H2019.

CCT also stands to benefit from the completion of the 51-storey CapitaSpring development scheduled for H1 2021, which will open up 635,000 sqft of office space. Supply of new office space is projected to be only 899,781 sqft in 2021, which poses minimal competition for CapitaSpring. Already, JPMorgan has committed to 155,000 sqft or 24% of NLA at CapitaSpring.

Meanwhile, KREIT only has 1.6% of portfolio NLA for renewal in H2. However, its WALE was at 5.3 years as of June, with Singapore at 4.2 years, Australia at 9.4 years and South Korea at 2.5 years. UOBKH reported that this is one of the longest WALEs for Singapore REITs.

KREIT’s development of 311 Spencer Street in Melbourne, set to be completed in the first half of 2020, will also provide an NPI yield of 6.4%.

On the other hand, 23.4% out of 24.9% of NLA for Suntec City Office has already completed renewal. Leases with office NLA of 180,000 sqft were signed with positive rental reversion of 7.9% in Q2. However, some weaknesses were noted at Suntec City Mall, with only 20.1% completed renewals out of the 33.4% up this year, although occupancy improved slightly by 0.6 ppt QoQ to 98.3%.

Suntec also boasts a 100% pre-leased occupancy of 9 Penang Road thanks to UBS, which will occupy all eight floors across two wings with NLA of 381,000 sqft.

Demand for office space was generated mainly by the technology, media, and telecommunications (TMT) sector as well as the co-working operators.

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