- US office on a firmer footing for recovery in 2022, albeit uneven
- Indicators show that more than 35% of US office SREITs’ submarkets have turned positive, with KORE leading its peers, at c.82%
- US office SREITs offer an attractive c.9% yield and yield spread of c.6% vs. SREITs’ c.3%
- Prefer KORE, given its stronger submarkets
US office on a firmer footing for recovery in 2022, albeit uneven. After two years of a pandemic-driven correction, the US office market is finally showing positive signs of recovery in 2H2021. Key optimistic datapoints include i) 4Q21 seeing a second consecutive quarter of positive net absorption, with 61% of the submarkets recording positive absorption in 4Q21; ii) the first decline in the vacancy rate since the pandemic; and iii) that construction and sublease activities are declining. The positive momentum continues into 1Q22, but recovery appears uneven across the submarkets.
US office SREIT submarkets with optimistic outlook contribute more than 35% of NPI/CRI, with KORE taking the lead at c.82%. Based on JLL’s 1Q2022 US office market insights, US office SREITs’ submarkets that are showing positive signs of recovery contribute more than 35% of NPI/CRI. This is led by KORE, with positive submarkets comprising c.82% of NPI, followed by PRIME at 44% and MUST at c.35% of NPI.
US office SREITs’ yield spread remains attractive, despite near-term share price overhang from macroeconomic uncertainty; prefer KORE. We maintain our positive stance on US office SREITs but lower our target prices by an average of c.12% to incorporate a higher risk-free rate of 3.5% and roll forward the DCF valuation to FY23F. Despite a DPU revision of c.-4% / c.-6% for FY22F/23F, US office SREITs are currently trading at a c.9.2% yield, offering an attractive yield spread of c.6.2%, vs. SREITs at c.3.3%, especially in a rising interest rate environment. Our preferred pick is KORE amongst the three, given stronger submarkets, a higher growth profile, and lower gearing, implying capacity to deliver an upside surprise from acquisitions. However, we highlight that MUST’s share prices have underperformed compared to its peers, falling below the pandemic trough in Mar 2020. Although, while MUST’s submarkets appear to have lagged its peers, share price downside risks are possibly limited at this level.