Robust momentum in office deals highlights that Commercial S-REITs/Developers are undervalued
- Bugis Junction Towers reportedly could be sold at S$2,700 psf to Sun venture; Kajima looking to redevelop Nehsons Building.
- Gentrification of the Bugis area could drive a re-rating in Bugis rentals and catchup with the CBD
- Flurry of office deals (including redevelopments) at c.3.0% highlights that capital values are likely stable rather than deteriorate despite higher benchmark yields.
- Positive for Office REITs (CICT, KREIT) and landlords (GUOCO,CDL,UOL) who are trading below replacement costs
What has happened.
It was reported today in the media that Sun Venture is in due diligence to acquire 15-storey Bugis Junction Towers for S$675m – S$680m and Japanese developer Kajima is looking to acquire Nehsons Building, an aging 50-year building in Peck Seah Street for S$111.1m. The flurry of office deals and rising momentum in deal flow highlights the positive fundamentals for this asset class, aided by a sweet mix of (i) lack of supply and (ii) heightened demand for space from existing occupiers (financial firms) and new tech companies relocating and expanding in Singapore.
Our view
An attractive return for the seller; Sun venture is recycling capital and trading up ? Bugis Junction Towers was acquired by a consortium led by Angelo Gordon, a US based alternative investment manager S$547.5m (or S$2,200 psf) back in 2019. Angelo Gordon acquired the property from Keppel REIT who also made a hefty return since its acquisition of the property back in 2006. If the sale is completed, this presents a return of over 24% over 3 years. The proposed purchase price of S$675m – S$680m by Sun Venture implies a transaction price of S$2,700 psf and an implies an entry yield that is below 3.0% This is based on average monthly rents of S$8 psf, according to media reports. The property could be re-let higher in our view given the gentrification of Bugis, led by the development of Guoco Mid-town (by end of 2023) and upcoming residential developments nearby.
Faced with increasing debt funding costs with the 3-year/5-year SGD swap rates hitting new highs, this implies the buyer is likely to be taking a longer term view of the growth of Bugis precinct, given negative spreads in the near term. As such, we believe that Sun Venture could be looking at the potential uplift in rents once nearby developments are completed with an increased cluster of firms and workers in the Bugis precinct. Assuming that average rents of S$10psf – s$11psf rent, the target yield could rise to between 3.2%-3.6% in the medium term. That said, Sun Venture could also be looking to redeploy is capital from the proposed sale of Westgate tower for s$675m to a fund led by AEW, a US real estate fund manager.
Positive office call is maintained. This reaffirms our view that Singapore real estate (especially commercial real estate) remains one of the key real estate sectors that international investors like to deploy in given the encouraging fundamentals (demand > supply for next 2 years), fuelled by the view that Singapore real estate holds its value for investors. We maintain our positive view on CICT (BUY, TP S$2.70) and KREIT (BUY, TP S$1.40). Given the strong deal flow at target yields of low 3.0% level, we believe investors’ worries of office S-REITs experiencing risk of cap rate expansions (resulting in a drop in NAV) is likely a remote scenario.
Developers trading below replacement costs. Landlords like Guocoland (P/NAV of < 0.5x), UOL Group (P/NAV of 0.6x) and City Developments (P/NAV of <0.7x) is attractive given that expected uplifts in NAVs/RNAVs, implying that developers remain trading below replacement costs.