Nov 17 2021, 02:25 PM
QUOTE
Opinion
THE LEVEL GROUND; Reits may not be best vehicles to hold prime Singapore office assets
Leslie Yee
Leslie Yee , Reits may not be best vehicles to hold prime Singapore office assets
1277 words
16 November 2021
Business Times Singapore
STBT
English
© 2021 SPH Media Limited
Private funds, other buyers may be more competitive in pricing office buildings due to greater borrowing flexibility
Singapore
MANY office workers are still working from home amid a high number of Covid-19 cases.
Office landlords fret over when companies can get large numbers of staff back to offices safely and whether greater adoption of remote working reduces space needs.
The Urban Redevelopment Authority's (URA) central region office rental index fell 3.5 per cent quarter-on-quarter (q-o-q) in Q3 2021, reversing the 1.3 per cent rise in Q2 2021.
However, fears over the demise of office spaces may be overblown. Consultants commenting on the URA's data point to a "flight-to-quality" by tenants resulting in a two-tier market.
The URA's Q3 2021 data showed that Category 1 office buildings - covering the better quality buildings in the city area - posted the second consecutive q-o-q rise in median rental, while median rental fell for the remaining office space there.
The need for high-quality office spaces for knowledge workers to meet in person to collaborate and co-create appears intact.
Some investors are also bullish on office buildings. News broke in September of the purchase by Rivulets Investments of a 20-storey office building at 61 Robinson Road in the Central Business District (CBD) for S$422 million.
The price paid by the home-grown private equity fund management group works out to S$2,973 per square foot (psf) based on post-refurbishment net lettable area (NLA) of 141,958 sq ft, or S$2,887 psf based on a higher NLA of 146,174 sq ft, primarily when multiple units on the same floor are reconfigured as a single unit. 61 Robinson sits on land with about 74.5 years of land lease outstanding.
Rivulets targets to achieve a net yield of at least 3 per cent on a stabilised basis for this acquisition.
This transaction raises questions on whether prime CBD office assets held by real estate investment trusts (Reits) are undervalued.
CapitaLand Integrated Commercial Trust (CICT) owns CBD Grade A office assets such as Asia Square Tower 2 (AST2) and Capital Tower (CT), which posted net property income (NPI) of S$39.1 million and S$26.3 million respectively for the first 6 months of 2021.
As at end-2020, AST2 and CT were valued at S$2.128 billion (around S$2,739 psf on NLA) and S$1.389 billion (around S$1,890 psf on NLA) respectively.
Based on annualising first half NPI, yields of AST2 and CT are 3.7 per cent and 3.8 per cent respectively. AST2 and CT sit on land leases with outstanding tenures of around 85 years and 73 years respectively.
Compared to the pricing of 61 Robinson Road, AST2 and CT appear cheap based on yield and dollar psf.
CICT trades at a slight premium to its book value. Other Reits owning prime CBD office assets here trade at discounts to net asset value (NAV), which implies investors may be applying a material discount to the value of their assets.
Based on closing prices as at Nov 12, 2021, Keppel Reit traded at a 12 per cent discount to end-Jun NAV while Suntec Reit traded at a 25 per cent discount to end-Sep NAV.
Keppel Reit holds stakes in prime CBD office assets such as One Raffles Quay (ORQ) and Ocean Financial Centre (OFC), with land lease tenures outstanding of around 79 years and 89 years respectively. Based on annualised NPI for the first 6 months and valuations as at Jun 30, 2021, yields of ORQ and OFC are 3.0 per cent and 3.2 per cent respectively.
Earlier this year, Suntec Reit sold a portfolio of strata units at Suntec City Office in Singapore's CBD for S$197 million, which represented an 8.9 per cent premium over its independent valuation of S$180.9 million.
Perhaps Reits here should consider divesting more prime Singapore office assets, given valuations are relatively low in some cases and trusts trade below book value in other instances.
The journey to list Reits owning prime Singapore CBD office assets has not been easy. CapitaCommercial Trust and K-Reit Asia, which owned prime Singapore office portfolios at the time of listing, were listed via distribution in specie of units to shareholders of CapitaLand and Keppel Land respectively, instead of initial public offerings (IPOs).
When OUE Commercial Reit did an IPO, its sponsor provided income support for the trust's key asset, OUE Bayfront property, which is a predominantly office asset in the CBD, so as to provide investors with an appropriate distribution yield.
Reits may not be the best vehicles to hold prime Singapore office assets.
Private funds and other buyers may be more competitive in pricing prime office buildings. This could be due to having greater flexibility in borrowing compared with listed Reits, which are subject to gearing restrictions.
Wealthy families or institutions may desire more control over the underlying property through direct ownership compared with holding units in a Reit.
Some non-Reit investors may be more patient with their capital and hence willing to accept lower initial yields. Such investors, who seek to park monies in chunky assets in safe haven Singapore, may not be overly concerned with the entry yield or the speed at which workers return to physical offices.
The effect of abundant liquidity pursuing income generating non-residential property may impact office property more as offices arguably require less specialised management skill sets than malls, warehouses, hotels or data centres.
Retail investors here may yearn for more prime Singapore office assets to be available for investment via local-listed Reits.
Think of the prime office portfolio held by unlisted Pontiac Land, which owns properties such as Millenia Tower and Centennial Tower, or the large CBD office portfolios of listed groups such as City Developments and Singapore Land Group.
Also, relatively new developments in the CBD with big office components such as Guoco Tower in Tanjong Pagar and Marina One in Marina Bay, have not found their way into Reits yet.
Holding office buildings in a listed corporate group structure may be even less efficient than via a listed Reit. Singapore Land traded at a discount to book of 47 per cent as at Nov 12, 2021.
Singapore Land may give its investors a boost by putting assets such as UIC Building, Singapore Land Tower, The Gateway and Clifford Centre into a Reit, as would GuocoLand, if it injected Guoco Tower, which was valued at S$2.55 billion as at Jun 30, into a Reit.
However, boards of property groups may conclude from their studies that private funds are superior to Reits for holding prime Singapore offices.
A Reit can offer an individual investor a chance to get a tiny slice of the income of prime office assets here.
But there are doubts over whether existing Reits should continue to hold prime Singapore office buildings, or whether new prime office Reits will emerge.
Should Reits be suboptimal for holding shiny office towers, the individual investor, who is confident in Singapore's continued growth as a business hub and in office workers returning to physical offices, stands to lose.
Perhaps Reits here should consider divesting more prime Singapore office assets, given valuations are relatively low in some cases and trusts trade below book value in other instances.
SPH Media Limited
THE LEVEL GROUND; Reits may not be best vehicles to hold prime Singapore office assets
Leslie Yee
Leslie Yee , Reits may not be best vehicles to hold prime Singapore office assets
1277 words
16 November 2021
Business Times Singapore
STBT
English
© 2021 SPH Media Limited
Private funds, other buyers may be more competitive in pricing office buildings due to greater borrowing flexibility
Singapore
MANY office workers are still working from home amid a high number of Covid-19 cases.
Office landlords fret over when companies can get large numbers of staff back to offices safely and whether greater adoption of remote working reduces space needs.
The Urban Redevelopment Authority's (URA) central region office rental index fell 3.5 per cent quarter-on-quarter (q-o-q) in Q3 2021, reversing the 1.3 per cent rise in Q2 2021.
However, fears over the demise of office spaces may be overblown. Consultants commenting on the URA's data point to a "flight-to-quality" by tenants resulting in a two-tier market.
The URA's Q3 2021 data showed that Category 1 office buildings - covering the better quality buildings in the city area - posted the second consecutive q-o-q rise in median rental, while median rental fell for the remaining office space there.
The need for high-quality office spaces for knowledge workers to meet in person to collaborate and co-create appears intact.
Some investors are also bullish on office buildings. News broke in September of the purchase by Rivulets Investments of a 20-storey office building at 61 Robinson Road in the Central Business District (CBD) for S$422 million.
The price paid by the home-grown private equity fund management group works out to S$2,973 per square foot (psf) based on post-refurbishment net lettable area (NLA) of 141,958 sq ft, or S$2,887 psf based on a higher NLA of 146,174 sq ft, primarily when multiple units on the same floor are reconfigured as a single unit. 61 Robinson sits on land with about 74.5 years of land lease outstanding.
Rivulets targets to achieve a net yield of at least 3 per cent on a stabilised basis for this acquisition.
This transaction raises questions on whether prime CBD office assets held by real estate investment trusts (Reits) are undervalued.
CapitaLand Integrated Commercial Trust (CICT) owns CBD Grade A office assets such as Asia Square Tower 2 (AST2) and Capital Tower (CT), which posted net property income (NPI) of S$39.1 million and S$26.3 million respectively for the first 6 months of 2021.
As at end-2020, AST2 and CT were valued at S$2.128 billion (around S$2,739 psf on NLA) and S$1.389 billion (around S$1,890 psf on NLA) respectively.
Based on annualising first half NPI, yields of AST2 and CT are 3.7 per cent and 3.8 per cent respectively. AST2 and CT sit on land leases with outstanding tenures of around 85 years and 73 years respectively.
Compared to the pricing of 61 Robinson Road, AST2 and CT appear cheap based on yield and dollar psf.
CICT trades at a slight premium to its book value. Other Reits owning prime CBD office assets here trade at discounts to net asset value (NAV), which implies investors may be applying a material discount to the value of their assets.
Based on closing prices as at Nov 12, 2021, Keppel Reit traded at a 12 per cent discount to end-Jun NAV while Suntec Reit traded at a 25 per cent discount to end-Sep NAV.
Keppel Reit holds stakes in prime CBD office assets such as One Raffles Quay (ORQ) and Ocean Financial Centre (OFC), with land lease tenures outstanding of around 79 years and 89 years respectively. Based on annualised NPI for the first 6 months and valuations as at Jun 30, 2021, yields of ORQ and OFC are 3.0 per cent and 3.2 per cent respectively.
Earlier this year, Suntec Reit sold a portfolio of strata units at Suntec City Office in Singapore's CBD for S$197 million, which represented an 8.9 per cent premium over its independent valuation of S$180.9 million.
Perhaps Reits here should consider divesting more prime Singapore office assets, given valuations are relatively low in some cases and trusts trade below book value in other instances.
The journey to list Reits owning prime Singapore CBD office assets has not been easy. CapitaCommercial Trust and K-Reit Asia, which owned prime Singapore office portfolios at the time of listing, were listed via distribution in specie of units to shareholders of CapitaLand and Keppel Land respectively, instead of initial public offerings (IPOs).
When OUE Commercial Reit did an IPO, its sponsor provided income support for the trust's key asset, OUE Bayfront property, which is a predominantly office asset in the CBD, so as to provide investors with an appropriate distribution yield.
Reits may not be the best vehicles to hold prime Singapore office assets.
Private funds and other buyers may be more competitive in pricing prime office buildings. This could be due to having greater flexibility in borrowing compared with listed Reits, which are subject to gearing restrictions.
Wealthy families or institutions may desire more control over the underlying property through direct ownership compared with holding units in a Reit.
Some non-Reit investors may be more patient with their capital and hence willing to accept lower initial yields. Such investors, who seek to park monies in chunky assets in safe haven Singapore, may not be overly concerned with the entry yield or the speed at which workers return to physical offices.
The effect of abundant liquidity pursuing income generating non-residential property may impact office property more as offices arguably require less specialised management skill sets than malls, warehouses, hotels or data centres.
Retail investors here may yearn for more prime Singapore office assets to be available for investment via local-listed Reits.
Think of the prime office portfolio held by unlisted Pontiac Land, which owns properties such as Millenia Tower and Centennial Tower, or the large CBD office portfolios of listed groups such as City Developments and Singapore Land Group.
Also, relatively new developments in the CBD with big office components such as Guoco Tower in Tanjong Pagar and Marina One in Marina Bay, have not found their way into Reits yet.
Holding office buildings in a listed corporate group structure may be even less efficient than via a listed Reit. Singapore Land traded at a discount to book of 47 per cent as at Nov 12, 2021.
Singapore Land may give its investors a boost by putting assets such as UIC Building, Singapore Land Tower, The Gateway and Clifford Centre into a Reit, as would GuocoLand, if it injected Guoco Tower, which was valued at S$2.55 billion as at Jun 30, into a Reit.
However, boards of property groups may conclude from their studies that private funds are superior to Reits for holding prime Singapore offices.
A Reit can offer an individual investor a chance to get a tiny slice of the income of prime office assets here.
But there are doubts over whether existing Reits should continue to hold prime Singapore office buildings, or whether new prime office Reits will emerge.
Should Reits be suboptimal for holding shiny office towers, the individual investor, who is confident in Singapore's continued growth as a business hub and in office workers returning to physical offices, stands to lose.
Perhaps Reits here should consider divesting more prime Singapore office assets, given valuations are relatively low in some cases and trusts trade below book value in other instances.
SPH Media Limited
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