SINGAPORE (June 19): CGS-CIMB analyst Lock Mun Yee has maintained her “overweight” call on the office property sector.

In a report dated June 18, Lock says she has maintained the call on valuation grounds, and in view of the prolonged low-interest-rate environment.

Lock has also identified CapitaLand Commercial Trust (CCT) and Keppel REIT (KREIT) as her top picks, with “add” calls, and target prices of $1.98, and $1.20, respectively.

“For office landlords, we prefer the pure plays among REITs. Our strategy is to prefer landlords with minimal lease expiries in 2020F and high portfolio occupancies,” she writes.

“KREIT and CCT have low expiries of 6% and 10% of their Singapore portfolio net lettable asset (NLA) as at end-1Q20. We expect them to enjoy flat to slight positive reversion for the remainder of this year given the low average expiring rents,” she adds.

KREIT offers an FY20F yield of 4.9% while CCT offers an FY20F yield of 4.2%.

While office viewing activities are expected to resume during phase two of the lifting of the circuit breaker measures, Lock expects leasing momentum to slow down due to site viewings by appointment only, and a weaker macro backdrop.

Office tenants, Lock says, would also likely to remain cautious on expansion plans, as they assess the impact of Covid-19 on their businesses.

As a result, Lock has reduced her forecast for overall office rent to decline by 5-10% in 2020F, compared to her previous forecast of a 0-5% decrease.

“Given the slower leasing momentum, we anticipate lower annual net absorption rate of 500k-700k sq ft for 2020F, below the estimate of 1.7m sq ft net demand in 2019,” she says.

“With around 1.9m sq ft of new completions this year, slower leasing demand would translate into higher vacancy level of c.11.3% by end-2020F, in our estimate,” Lock adds.

Lock also believes that existing buildings should fare better than new buildings, as tenants are likely to renew their existing leases instead of renting a new premise in the near-term.

“The upside catalyst to our view is that delays in construction activities may push back completions in the near term, which may help mitigate some of the projected rental declines,” she says.

On the new normal in a post-Covid-19 environment, Lock observes that while there is an emerging trend to de-densify office spaces, she does not expect these changes to take place overnight.

Citing a report by property consultant Cushman and Wakefield released in May, companies could see their footprint increase 15-20% due to social distancing measures, if companies don’t make any changes in enabling flexible working arrangements.

“[A] faster-than-expected macro recovery could re-rate the sector while downside risk is prolonged slowdown in economic activity which would dampen the demand for office space,” she concludes.

Units in CapitaLand Commercial Trust closed 8 cents lower, or 4.4% down, at $1.73, while units in Keppel REIT closed 2 cents lower, or 1.8% down, at $1.11, on Friday.