ST : Good times ahead for commercial property

15 JAN 2011,
Good times ahead for commercial property

Analysts expect rise in occupancy, rent with strong business growth

By Jonathan Kwok

THE office market is tipped to enjoy a boom for the next few years on the back of a robust economy that is encouraging bosses to increase hiring and expand their premises.

Analysts say the surging demand for space is coming up against the harsh reality of limited supply, with the usual outcome - rents and property prices are heading north and likely to continue in that direction for the next few years.

There are external factors driving the sector as well. Hong Kong rents are still twice the level of those here which can only enhance Singapore's appeal.

The increasingly buoyant office sector has forced some analysts to revise their forecasts.

Swiss bank Credit Suisse now expects Grade A rents to be $10.13 per sq ft this year, up from its previous high of $9.69. They should rise further to $11.60 next year and $12.92 in 2013.

'The demand-supply outlook is supportive of rising rents,' said a Credit Suisse note on Wednesday.

'Singapore... office rents are still at a 50 per cent discount to Hong Kong's, and the gap is expected to widen further.'

Credit Suisse notes that businesses are still in 'expansion mode', especially in the financial, insurance, oil and gas, service and shipping industries.

DMG & Partner Securities sees Grade A rents hitting $12 psf this year, which would mark a 20 per cent year-on-year increase. Prime rents will edge up slightly to $9 psf, DMG added. It noted yesterday that office demand will be driven by healthy economic growth and increased hiring, particularly in business and financial services.

But as demand grows, supply becomes more limited.

DMG estimates that the average take-up rate from 2010 to 2014 should register at 1.9 million sq ft a year, higher than the supply of 1.5 million sq ft. The excess demand will absorb some of the existing unoccupied space.

Limited supply will keep prices up, say analysts. DMG noted that while only half of the office supply this year is pre-leased, new supply coming on stream is 'limited from 2012 to 2014', averaging only 1.3 million sq ft a year versus the 20-year average of 1.9 million sq ft.

The broking house said that 2.5 million sq ft from six plots vested to a Malaysia- Singapore joint venture and 9.6 million sq ft from 13 plots in the Marina Bay precinct could increase supply, but these properties will not be finished until 2015 at the earliest.

'Conversion of aged offices, potentially 1.2 million to 2.5 million sq ft (of it), into inner-city condominiums could further lower supply,' it said.

DMG said that any significant jumps in supply should take place only in 2015.

Credit Suisse also noted that 2015 will be the year when new supply comes through, citing developments in Tanjong Pagar and South Beach that will be ready then.

This means that office occupancy will recover to 90 per cent in 2014, when a potential shortage in prime Central Business District (CBD) space is expected to occur, said the Swiss bank.

DMG said the market forces in play - rising rents, low interest rates and improving appetites for office space - will drive up property prices.

It expects Grade A capital values to hit $2,750 psf this year, a 12 per cent rise from last year, while prime capital values should reach $2,150 psf, up 3 per cent.

DMG's bullish view of the sector has prompted it to initiate coverage of office property players Overseas Union Enterprise (OUE) and Singapore Land with 'buy' calls on both.

It cites their many quality assets, solid dividend payouts and undemanding valuations. DMG has put a target price of $4.20 on OUE and $9.50 on Singapore Land.

Credit Suisse has raised its target price on CapitaCommercial Trust (CCT) from $1.63 to $1.81 and lifted its valuation of K-Reit Asia from $1.51 to $1.75. Suntec Reit's target price was increased to $1.64 from $1.60.

CCT and K-Reit have 'outperform' ratings from Credit Suisse, and it maintained its 'neutral' call on Suntec as it thinks the stock is fairly priced and expects stronger office growth to be partly offset by a weaker retail contribution.

jonkwok@sph.com.sg