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Office S-REITs VS Industrial S-REITs (2).

Sunday, October 2, 2011

I thought I should share some information which I have taken from CBRE's report in Q2 2011 as I have recently received questions from readers on REITs which derive income from office space rentals in Singapore.

For office space, it is expected that "vacancy levels rises (are) inevitable in the next 6 to 12 months. This is the result of increased levels of new supply coming on-stream in addition to second-hand space returning to the market.

"It is apparent the government has been seeking to bolster office supply to facilitate business expansion and to ensure that operating costs remains competitive vis-à-vis other regional cities. Notably, some 1.84 million sf (GFA) of commercial space could materialise from two newly listed parcels – Marina Bay and Paya Lebar. The quality, quantity and competitive cost of Singapore’s office space over other regional cities positions the city state to attract businesses. With global uncertainty lingering, the test is whether this will boost occupier demand and prove to be a winning formula.

"Looking at the office supply pipeline, approximately 8.4 million sf of space is to be completed from H2 2011 to 2015. The GLS sites awarded in Q2 2011 contributed about 10.0% (834,000 sf) of the total. Along with the confirmed conversion of the Market Street Carpark, a Q2 2011 number of landlords/developers are in the midst of repositioning older office buildings through redevelopment. We anticipate that more supply will emerge in due course with the focus on Core CBD."

Therefore, it is understandable why I am not very sanguine about the prospects of REITs such as Suntec REIT and CCT which are heavily exposed to office space rentals. I am instead more sanguine about industrial space rentals.

"Driven by the limited upcoming supply of hi-tech space in the next few years, monthly rent for hi-tech space rose to $2.75 psf in Q2 2011, up from $2.65 psf in the previous quarter.

"Despite the slowing economic growth, demand for factory and warehouse space remains healthy....

"Monthly rental for factories and warehouses rose during the quarter on the back of continued demand. In Q2 2011, the average monthly rents for factory units rose by $0.10 psf q-o-q to $1.85 psf and $1.50 psf for ground and upper floor units respectively. Meanwhile, the average monthly rent for warehouses also rose by $0.05 psf q-o-q to $1.70 psf for ground units and $1.40 psf for upper floor units.

"During the quarter, the capital values for 60-year leasehold strata-titled factory space increased by about 8.0% q-o-q to $312 psf for ground floor units and $230 psf for upper floor units. The capital values for freehold strata-titled warehouse space increased by a smaller 5.0% q-o-q to $471 psf and $412 psf for ground and upper floor units respectively.

"There is still demand for industrial space. Some companies are scouting for a larger space to consolidate their operations and at the same time expand. As such, we can expect some rental upside in the next half of the year."

I shan't say which industrial property S-REITs I like. I think it is easy enough to guess, is it not?

Read complete report here.

Related posts:
1. Industrial rent forecast strongest for Singapore.
2. Office S-REITs VS Industrial S-REITs.


Anonymous said...

Hi AK71,
Well put. No wonder the market decides CCT's price should be around $1.0. i am vested 15 lots from the last rights issued time. Sometime in 2009.
He! He! Maybe another rights issue is coming because of the rebuilding of Market ST multi-storey car park. i think for long-term investors it's alright to subscribe if you have the staying power.
May i know what is your opinion?

AK71 said...

Hi Temperament,

I would assess the merits of each rights issue before making a decision. Not all rights issues are created equal.

To make a decision to subscribe simply because we have the holding power as long term investors could be a wealth destructive exercise in the worst case scenario.

This has been amply manifested in the case of Cityspring Infrastructure Trust.

Cityspring Infrastructure Trust: Rights issue.

I have not been tracking CCT for some time and cannot comment on its numbers. I definitely cannot comment on the merits of what it might be doing in future (at least not now).

Do your due diligence and I am sure you will be OK. :)

Nick said...

I dont think a rights issue is needed for CCT - gearing stands at 27% and they have over $400 million cash. The current development can be largely funded from the existing cash position. But AK is right about how cyclical the office industry is. CCT is one of the better office plays. Not a big fan of Suntec and KREIT after the MBFC deals. But this is just my own point of view. Feel free to disagree


(Not Vested in any REITs)

AK71 said...

Hi Nick,

Thanks for sharing the numbers for CCT. :)

Hi Temperament,

It seems that Nick has done some due diligence on your behalf. ;)

Anonymous said...

Since CCT is Cash+ plus only 27% gearing, if there is a rights issue now, wouldn't it be loverly? And it's parent is Capitaland, right? And this is one of my "tactics" to wait for REIT'S rights issue which Most REITS sooner or later will call for rights issue. Ya?
And this is also many people don't like REITS. And they are right and wrong in a way. After all, other type of companies do call for rights issue too. Only not as often as REITS. They say REITS can only growth through rights issue or debt. Which to me is O. K. as long as they are growing in value. NO?
Of course not all rights issue is yield-accretive.
May i hear something new. i love to learn and share.

AK71 said...

Hi Temperament,

My views on REITs are probably well known and I have probably blogged about issues you have raised as well.

It does not matter if it is a REIT or a company, as long as it is raising funds for value adding activities which will result in returns which are above the current rate for its investors, it is a good exercise. :)

Ah John said...

Hi AK, just curious, how did you get the report? I wondering how to collect useful information. Or do any paid service recommend? Thanks!

AK71 said...

Hi Ah John,

I just scour the internet from time to time. Just Google. Quite easy and we do get useful information for free sometimes. ;)

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