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Positive outlook for office REITs as GDP recovers: DBS

Lim Hui Jie
Lim Hui Jie • 3 min read
Positive outlook for office REITs as GDP recovers: DBS
Despite a rise in flexible working arrangements, DBS Group Research still has a positive outlook on office spaces in Singapore.
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DBS Group Research’s Rachel Tan and Derek Tan have maintained a positive sentiment on office spaces in Singapore, despite a rising trend of flexible working arrangements.

They expect demand for office space emerging “with a new face” post Covid-19. With technology enablers and positive feedback from employees, firms should increasingly look to adopt more flexible working arrangements, with the aim of crystallising occupancy savings in the near term.

However, they believe that the level of adoption will likely vary according to sectors and job scopes, as it is not a one-size-fits-all arrangement. “While return of space in the coming years remains an overhang, we believe that the Grade A offices, with property attributes surrounding sustainability, will continue to attract tenants and remain resilient,” the analysts add.

The analysts believe financial institutions and the insurance sector, which contribute about 50% of total space in the Central Business District (CBD), may return the most space, but less so in the other sectors.

In their scenario analysis, the analysts estimate that about 1.1 million square feet of negative net absorption could translate into shadow space/vacancy in the coming years. As such, CBD office vacancy rates may increase to about 14% as a result.

However, the analysts are of the opinion that office demand and office S-REIT share prices correlate positively with Singapore’s GDP, and said it tracks the recovery quite closely to GDP recovery as seen in historical trends over the past three recessions.


See: Low levels of supply and record low vacancies will set the stage for 'faster recovery' for Singapore office REITs: DBS


See: Singapore's economy expected to expand between 5% – 5.9% in 2021: MAS Survey

As such, they see potentially higher-than-expected economic and employment expansion could mitigate the headwinds led by the hybrid working model. In addition, the limited new supply or office space (net supply of 167,000 sq ft from 2020F-2022F) could prevent a steep decline in rental rates.

Heading into 2021, the analyst said recovery from the Covid-19 pandemic is underway and given the close correlation between GDP, demand and share price, they “see the office laggards turning into leaders” in 2021.

“We believe the sector remains attractive at 0.9x P/NAV, at its historical average. With the vaccine now within sight, we believe a return to normalcy would be the catalyst to drive office S-REITs’ share prices towards 1.1x P/NAV, or 1SD above their historical average.” they conclude.

The analysts say their top picks for the sector are Keppel REIT, Capitaland Integrated Commercial Trust, and Mapletree Commercial trust. They have given a “buy” rating for all three stocks, with target prices of $1.40, $2.50 and $2.25 respectively.

Suntec REIT and OUE Commercial REIT were also given “buy” ratings, with target prices of $1.85 and 50 cents.

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