SINGAPORE (July 11): Manulife Centre on Bras Basah Road is targeted by British property group Chelsfield for $550 million, according to media reports.

This translates to a psf price of $2,300 on net lettable area (NLA) of 242,000 sf.

In a Tuesday note, DBS Group Research says the potential sale of Manulife Centre at a mid-2% yield based on NPI (net property income) is a continuation of the trend of fringe CBD office properties being sold on tight yields contrary to investor expectations that Singapore office cap rates should expand in a rising interest rate environment.

Recent fringe CBD office transactions include the disposal by CapitaLand Commercial Trust (CCT) of Twenty Anson to AEW on a 2.7% NPI yield as well as a 50% interest One George Street and Wilkie Edge on 3.2% and 3.4% exit yields respectively, according to DBS.

The research house believes these transactions highlight the desirability of Singapore office properties as an attractive investment class by global investors contrary to equity investors who have marked down office REITs.

“Office REITs currently trade below book value which we believe is unjustified given that the better located Grade A office buildings owned by the REITs are being valued by the REITs using a 3.6-4.10% cap rate,” says leas analyst Mervin Song.

In addition, prospects of a multi-year recovery in office rents given easing supply pressures over the next 3-4 years should translate to office REITs trading at least at book value if not a premium.

Evidence of the strong recovery rents is the reported 4.1% q-o-q increase in Grade A rents to $10 psf/month in June, up from lows of $8.95 psf/month in 1H17. This faster than expected increase in rents also provides upside risk to DBS’s DPU estimates.

With evidence that office values in Singapore are holding up if not increasing, and rents are on an upward trend, DBS is maintaining its overweight stance on office REITs with CapitaLand Commercial Trust (“buy” with target price of $2.12) as its top pick.

As at 11.11am, units in CCT are trading at 1 cent lower at $1.73 at 5.1% yield for FY19/20F and 0.98 times FY19/20F book value.