DBS says 'time to relook' office Reits as Chinese tech giants' expansion plans for Singapore spur demand

DBS's top picks for the sector are Keppel Reit and Mapletree Commercial Trust. PHOTO: ST FILE

SINGAPORE (THE BUSINESS TIMES) - DBS Group Research on Wednesday (Sept 16) reiterated its positive stance on Singapore office real estate investment trusts (Reits), citing a potential upcycle in office demand spurred by the expansion plans of Chinese technology giants.

In their report, analysts Rachel Tan and Derek Tan pointed to recent news that Tencent had picked Singapore as its Asia hub after setbacks in the United States and India, with other Chinese giants, including Alibaba and ByteDance, also reportedly making plans to expand in the Republic.

Investors should "watch out for this as an inflection point", the analysts said, adding that the sector remains attractive as it is trading at a price to net asset value ratio of 0.8 times.

Describing news of Tencent's upcoming expansion as "a jab in the arm" for office landlords, Mr Tan and Ms Tan said they believe the entry of new investments implies new demand for office space in Singapore.

"While the return of existing office space will likely be more gradual, demand from these tech giants is immediate, judging by the job postings on various career platforms," they said.

The analysts also noted the office market's high occupancy and limited upcoming supply until 2022. Given these factors, they believe the new demand, and its potential multiplier spillover impact, will "spur the Singapore office market to its next phase of upcycle, along with the recovery of the Singapore economy".

Potential beneficiaries from the entry of the Chinese firms are Grade A prime Central Business District office landlords such as CapitaLand Commercial Trust (CCT) and Keppel Reit, which have vacancies to be filled, Mr Tan and Ms Tan said. They pointed to CCT's upcoming completion of integrated development CapitaSpring, and Keppel Reit's portfolio of quality Grade A office assets.

While business parks could also stand to gain, the analysts said they understood there are minimal vacancies in the Alexandra and one-north precincts, which are areas that may attract these Chinese tech firms. Meanwhile, Science Park properties will need to be redeveloped to attract the firms to relocate there, they added.

DBS' top picks for the sector are Keppel Reit and Mapletree Commercial Trust (MCT). DBS has issued "buy" calls on both, with a target price of $1.35 for Keppel Reit and $2.25 for MCT.

Units of Keppel Reit were trading at $1.12 as at the midday break on Wednesday, up two cents or 1.8 per cent, while MCT units were at $2.01, up one cent or 0.5 per cent.

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