ST : Demand 'set to push up prime office rents'

Sep 24, 2010

Demand 'set to push up prime office rents'

No fear of oversupply, say Credit Suisse analysts who see office Reits as a good buy

By Gabriel Chen

CREDIT Suisse has dismissed fears of an oversupply in the office sector and is tipping that rents will rise as demand picks up.

The bank's analysts said new space is being taken up, while old supply is being removed from the market and converted into residential use.

'We think rents are on the rise and could hit $12 per sq ft (psf) by 2012 for Super Prime A. Meanwhile, we expect Grade A rents to trend up to $10.50 to $11.50 psf, and prime buildings such as Bugis Junction Towers and Suntec to hit the $9 psf level in 2012.'

There is no official grading system for office space, but Grade A typically refers to the most premium category. For CB

Richard Ellis, offices that lie within the Raffles Place, Marina Bay and Marina Centre area are classified as prime. Credit Suisse splits Grade A into two categories - normal Grade A and Super Prime A.

Falling under Super Prime A are new or soon-to-be-completed buildings such as One Raffles Quay, Marina Bay Financial Centre, Ocean Financial Centre and 50 Collyer Quay.

Normal Grade A refers to older but strategically located buildings such as 6 Battery Road, Capital Tower and Prudential Tower.

Suntec City, Keppel Tower, GE Tower and Bugis Junction Tower have been categorised under Prime, which refers to older buildings that fall inside the central business district.

The Credit Suisse report noted that rents for Super Prime A hit a peak of $18.40 psf a month in the third quarter of 2008.

Analysts from across the sector say the rental outlook is favourable as office demand is expected to grow in step with the economy.

'With rental values on the rebound, larger occupiers are anxious to lock in rents for prime office space. This has led to strong pre-commitment rates for uncompleted office buildings like Ocean Financial Centre,' said Ms Cheng Siow Ying, DTZ Debenham Tie Leung's executive director for business space.

DTZ Research said the office market has rebounded, with rents rising in all districts in the third quarter.

It added that prime rents in Raffles Place rose 6.3 per cent quarter-on-quarter to an average of $8.40 psf.

Investors keen on the sector should look at office real estate investment trusts (Reits) because they have the greatest exposure to Grade A space, say Credit Suisse analysts.

When rents increase, so should the unit prices of these Reits.

The bank's top pick in the office Reit sector is CapitaCommercial Trust (CCT). It has an 'outperform' rating on the Reit and a target price of $1.63.

'We believe its $750 million war chest is likely to be reinvested into higher-yielding opportunities,' said the bank.

CCT closed eight cents higher yesterday at $1.48.

gabrielc@sph.com.sg