Recent transactions driving cap values. Several recent office transactions in the CBD area drove valuation benchmarks higher, suggesting that players in the prime office space are bullish on fundamentals. Last week, One Finlayson Green was sold by Lucrum Capital to Kerisvalue Pte Ltd for $227m ($2,520 psf) - 56% higher than what Lucrum paid for the property in Mar 10. K-Reit also acquired levels 26-29 of Prudential Tower for $125.1m or $117m (without rental support), which translates to $2,430 psf. This increased K-Reit's stake in the property to 92.8% and we note the price psf was 54% higher than the $1,579 it paid for levels 20-25 in Sep 09. In addition, Capital Square was sold for $889m ($2,300 psf) to Alpha Investment Partner's Macro Trends Fund and NTUC Income - a record sized deal for the year so far.
Office rents continue uptrend. After bottoming out in 4Q09, rents have shown a steady uptrend since. Data from Colliers International showed that average 1Q11 rents in the Raffles/New Downtown micro-market increased 8% QoQ to $9.72, after 11.5% and 10.9% QoQ growth in 4Q10 and 3Q10 respectively. Average rents in the CDB also increased 10.2% YoY in 1Q11. We expect office landlords to see positive rental reversions from 2H11 onwards as initial rents start exceeding passing rents, given the length of most leases at 2-3 years.
Healthy pre-commitments reflect demand. Despite significant supply (est. 5mn sq ft) coming onstream from FY11-13, we observe strong pre-commitments at major CBD projects completing in FY11-12. OUE Bayfront is around 70% pre-committed with current rents estimated at $12. Keppel Land (KepLand)'s Ocean Financial Center and Marina Bay Financial Center (MBFC) Tower 3 are about 80% and 66% pre-committed respectively. Finally, Asia Square Tower 1 is over 50% pre-leased. We believe the strong pre-commitments reflects expectations of healthy job growth and corporate tenants recognizing that rents will likely rise further given continuing fundamentals and an expected decline in prime office supply beyond FY13.
Overweight on prime office assets. We update our views on the office sector given recent transactions and rising rents, and favor developers with significant exposure to prime office assets such as Kepland. In particular, we think there are interesting options for KepLand in terms of divesting Ocean Financial Centre and Marina Bay Financial Centre Phase 2 to K-Reit after the properties have TOP-ed and stabilized. We update our valuations of KepLand's office assets and maintain a BUY rating at a fair value of $5.12 (at parity to RNAV).
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