Moving up a gear in 2022

• Mixed commercial S-REITs to offer stronger growth, riding on reopening and return-to-office recovery
• Little/manageable office supply in the next two years paves way for a steady office recovery
• Bigger adoption of hybrid working may raise uncertainty but shadow space can be absorbed
• Sector remains attractive at 0.9x P/NAV; top picks are Suntec, CICT and MCT

Pressing ahead with reopening and return-to-office; prefer mixed commercial S-REITs offering stronger growth. Looking beyond the risk from the Omicron variant, we believe that reopening and return-to-office will continue to be a key theme as 2022 unfolds and Singapore heads towards a new normal. We prefer mixed commercial S-REITs which offer stronger growth trajectory of 8-20% in FY22F, riding on retail recovery from a low base in FY21F and return-to-office exodus. Our top picks are Suntec, CICT and MCT which offer the strongest FY22F DPU growth compared to their peers.

Little/manageable office supply in the next two years paves way for a longer runway for office rents to recover. Despite Singapore remaining in a “work-from-home” as default for the most of 2021, Singapore office rents showed a stronger recovery as vacancy spaces at key buildings, namely Asia Square Tower and CapitaSpring, are now close to fully committed. In addition, further delays in completion of large new incoming supply, i.e. Guoco Midtown (extended to FY23F) and Central Boulevard Tower (extended to FY24F) provide a longer runway for office rents to recover. In addition, the increasing “flight to quality” trend shows that good quality prime office buildings are still desired and will likely lead the recovery come 2022.

Shadow space emerging from more companies adopting a core+flex model can be easily absorbed, aided by tight supply. As we move onward to a third year of the pandemic in 2022, the adoption of hybrid working could increase as corporations increasingly adopt a more core+flex approach which gives more agility in times of uncertainty. With limited new supply completions, based on leases coming due for the overall sector in 2022–2024, we estimate that up to c.20% of potential downsizing from expiring leases in FY22F-FY24F of up to 800k sqft of shadow space is still manageable, in line with historical demand trends.