Singapore Industry Focus Singapore Office REITs Refer to important disclosures at the end of this report DBS Group Research . Equity 5 Sep 2016 A prelude to a bottom STI : 2,803.92 Healthy interest for new office buildings with Analyst Mervin SONG CFA +65 6682 3715 over 70% of Guoco Tower now pre-committed [email protected] Award of white site at Central Boulevard another Derek TAN +65 6682 3716 signal to potential bottoming of office values [email protected] Top pick – Keppel REIT (KREIT; BUY; TP S$1.26) Healthy interest for space at Guoco Tower and Marina One. According to The Business Times, Guoco Tower at Tanjong Pagar has now achieved pre-commitment levels of more than 70%, from only 10% in January this year. In addition, effective rents were STOCKS reported to range between S$7.50 to over S$10 per square foot Performance (%) (psf) per month. For Marina One, it was reported that Swiss private Price Mkt Cap Target Price bank Julius Baer will be taking up 100,000 sqft of space at close to S$ US$m S$ 3 mth 12 mth Rating double digit-rents, relocating from its current premises at Asia 1.57 3,402 1.70 11.4 19.9 BUY Square Tower 1 where it occupies 72,000 sqft across two floors. CapitaLand This new lease would take pre-commitment levels to c.35% from Commercial Trust the 30% level announced in June. The healthy take-up and the Keppel REIT 1.09 2,615 1.26 4.8 14.8 BUY OUE Commercial 0.68 647 0.73 2.3 8.8 HOLD ability to sign office rents above S$10 psf at Guoco Tower and Suntec REIT 1.70 3,162 1.71 3.0 12.2 HOLD Marina One indicate that the office market could potentially be bottoming out and allay fears over Grade A office rents crashing to Source: DBS Bank, Bloomberg Finance L.P. S$7 psf per month from S$9.50 currently, and that new office supply will not be absorbed. Implied price psf for Singapore portfolio Singapore office REITs seem insulated from major poaching REIT Price Enterprise Value of Total Implied psf of tenants. Thus far, Singapore office REITs appear to be relatively (S$) Value SG attributable (S$) immune to poaching of their tenants for the upcoming new office (S$m) portfolio SG GFA (m supply, and should be able to hold fort against competition. We (S$m) sqft) believe this is a function of the proactive renewal strategy by CCT 1.565 6,947 6,006 3.1 1,921 various office REIT managers as well as the REITs typically owning KREIT 1.085 6,859 6,225 2.6 2,396 newer or better specified buildings. These factors should counter OUECT 0.680 2,689 2,322 1.0 2,353 tenants’ flight to quality and efficiency as they seek better quality space at comparable rents to their existing premises and/or more Suntec 1.700 7,547 5,192 2.4 2,203 efficient floor plates to house more staff within the same amount *Calculated as EV less value of non Grade A office properties divided of space. by attributed property Source: Bloomberg Finance L.P., Various SREITs, DBS Bank New office land auction a potential catalyst for office market. We believe the upcoming land tender for a prime site at Central Boulevard in Marina Bay could act as another signal to mark the bottom of capital values in the office market especially if Majority of FY16 leases have already been renewed* the implied gross development values (GDV) is close to recent Percentage of FY16 leases yet to be renewed office market transactions of c.S$2,700 psf. The white site allows 16% 14% for maximum gross floor area (GFA) of 141,000 sqm with at least 12% 100,000 sqm for office use and has a minimum tender price of S$1.54bn or c.S$1,010 psf per plot ratio. With no new office 10% supply from 2018 onwards with the exception of this site, we 8% believe the land auction will create significant pricing tension. 6% 4% 2% Office REITs trade at unwarranted discount to physical market transactions. We believe that the current “flight to 0% quality” for tenants to newer office buildings implies that CCT KREIT OUECT Suntec downward pressure on office rents is easing and may be close to a Dec-15 Mar-16 Jun-16 bottom. In addition, with office REITs trading at 11-29% discounts * Less than 10% of leases are now up for renewal for the remainder of to the implied prices of recent Grade A office transactions, we 2016 believe the risk reward for office SREITs is favourable. There is value to remain vested in the office REITs and our pick is KREIT Source: Bloomberg Finance L.P., Various SREITs, DBS Bank (BUY, TP S$1.26) for its 23% discount to book value and reduced tenancy renewal risks near term with c.90% of leases not due until 2018 and beyond. CapitaLand Commercial Trust (CCT; BUY, TP S$1.70) remains attractive for its steady growth profile on the back of the recent acquisition of the remaining 60% stake in CapitaGreen. ed-JS / sa JC, PY Industry Focus Singapore Office REITs Recent office leases Tenant Moving To Grade Size (sqft) Vacating from Remarks K Line Guoco Tower A 20,000 Axa Tower Bunge Guoco Tower A n/a 77 Robinson Road Manpower Guoco Tower A n/a International Plaza DNB Asia Guoco Tower A n/a 8 Shenton Way Hong Leong Bank Guoco Tower A n/a 20 Collyer Quay Open Link Guoco Tower A n/a 6 Raffles Quay Bank of Tokyo Marina One A 140,000 Republic Plaza Vacating 150,000 sqft across 13 floors, lease at Mitsubishi UFJ Republic Plaza expires in mid 2017 Mitsui Asia Square A 80,000 80 Robinson Road Moving across for c.$7.50-8.50 gross rent Tower 2 PWC Marina One A 180,000 PWC Building - 8 Moving across for c.$7 psf, lease at PWC Building Cross Street expires in early 2018, PWC potentially paying S$5 at PWC Building Daiwa Marina One A 35,000 OUE Downtown 2 SAS Guoco Tower A 20,000 Twenty Anson Julius Baer Marina One A 100,000 Asia Square Tower 1 Giving up 72,000 sqft of space spread over two floors at Asia Square Tower 1 to high density floor at close to double-digit rent ING Guoco Tower A 70,000 Republic Plaza Palo Alto Networks Guoco Tower A 36,000 Millennia Tower Moving out of 20,000 sqft space at Millennia Tower to take up 36,000 sqft at Guoco Tower Itochu Singapore Guoco Tower A 28,000 Republic Plaza Amadeus Guoco Tower A 36,000 Parkview Square in Occupying over 20,000 sqft of space at Parkview North Bridge Road Square and taking up 36,000 sqft of space at Guoco Tower Source: Various press reports, DBS Bank Upcoming office supply Office (CBD) Location Developer Estimated NLA (sqft) Property Type 2016 Guoco Tower Peck Seah Street Guocoland 890,000 Leasing EON Shenton Shenton Way Roxy Pacific Holdings 101,000 Strata Sale SBF Center Robinson Road Far East 353,000 Strata Sale DUO Tower Rochor Road M + S 570,000 Leasing GSH Plaza Cecil Street GSH/TYJ/Vibrant/DB2 282,000 Strata Sale OUE Downtown 1 Shenton Way OUE 50,000 Leasing 2,246,000 2017 Marina One Marina Bay M + S 1,876,000 Leasing Redevelopment of International Factors Robinson Road Tuan Sing 194,000 Strata Sale Building and Robinson Towers V on Shenton Shenton Way UIC 278,000 Strata Sale Oxley Tower Robinson Road Oxley Consortium 112,000 Strata Sale Crown @ Robinson Robinson Road WyWy Developments 70,000 Strata Sale 2,530,000 2018 Frasers Tower Cecil Street Frasers Centrepoint Limited 645,000 Leasing 645,000 Source: Various REITs, DBS Bank Page 2 Industry Focus Singapore Office REITs Average office supply over 2015-2019 similar to 2010-2014 3,000 '000 sqft Post GFC S$ psf pm 20.0 2010‐2014 average: 2,500 18.0 2015‐2019 average: 16.0 2,000 1.4m sqft 14.0 1,500 12.0 1,000 10.0 500 8.0 0 6.0 ‐500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4.0 ‐1,000 Net supply: Downtown Core (LHS) Net demand: Downtown Core (LHS) 2.0 CBRE Grade A office rents (RHS) ‐1,500 ‐ Source: URA, Various REITs, DBS Bank Recent office transactions Date Property Location Land tenure Net Lettable Price ($) Price per NLA (S$) Area (sq ft) Aug-14 Equity Plaza Raffles Place 74 years remaining 252,135 550,000,000 2,181 Jul-14 Anson House Tanjong Pagar Area 82 years remaining 76,362 172,000,000 2,252 Sep-14 MBFC Tower 3 Marina Bay 92 447,327 1,248,000,000 2,790 Jan-15 AXA Tower Tanjong Pagar 66.5 remaining (2015) 675,000 1,170,000,000 1,733 Jun-15 One Raffles Place Raffles Place 99/FH 600,000 1,429,166,667 2,382 Nov-15 CPF Building 79 Robinson Road 99 LH (2067) 324,000 550,000,000 1,698 May-16 Remaining 60% interest Raffles Place 57 remaining expiring 703,122 1,600,500,000* 2,276 (2,700 in CapitaGreen 31Mar2073 assuming 99 year leasehold) May-16 Straits Trading Building 9 Battery Road 999 LH 158,897 560,000,000 3,524 Jun-16 Asia Square Tower 1 Marina Bay 99 LH from 2007 1,200,000 sqft 3,400,000,000 2,668 office & 40,000 sqft retail *Based on 100% equity interest Source: Various press reports, DBS Bank Office properties reported to be on the market and asking prices Date Property Location Land tenure Net Lettable Asking Price ($) Price per NLA (S$) Area (sq ft) Jun-16 77 Robinson Road (Ex 77 Robinson Road 99 LH from 1994 293,269 575,000,000 1,961 SIA building) Jun-16 50% stake in Capital 23 Church Street 99 LH 332,000 415,000,000 2,500 Square Jun-16 110 Robinson Road 110 Robinson Road 22,123 45,000,000 2,034 Source: Various press reports, DBS Bank Page 3 Industry Focus Singapore Office REITs Office SREIT peer comp Target Total REIT FYE Price Rec Price Return Mkt Cap Yield @ Current Price P/Bk (x) (S$) (S$) (%) S$'m FY16/17F FY17/18F FY16/17F FY17/18F Office CCT Dec 1.565 BUY 1.70 15% 4,628 5.7% 5.9% 0.88 0.89 KREIT Dec 1.085 BUY 1.26 22% 3,550 6.1% 6.1% 0.76 0.77 OUECT Dec 0.680 HOLD 0.73 14% 861 7.4% 7.4% 0.72 0.73 Suntec Dec 1.700 HOLD 1.71 7% 4,301 5.9% 5.9% 0.81 0.83 Source: Bloomberg Finance L.P., DBS Bank Location plan for Land Parcel at Central Boulevard Source: Various press reports, DBS Bank Page 4 Industry Focus Singapore Office REITs DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e.