Sunday, December 26, 2010

Office landlord stocks in vogue for 2011

OFFICE landlords are most in vogue when it comes to property stock picks for 2011.

Stock recommendations from five different research houses show that equity analysts are wary of property stocks with large exposure to the residential market as they are concerned that the government could announce more measures to cool the market.

Because of this, property groups and real estate investment trusts (Reits) with office and other commercial assets are preferred - especially since the outlook for the office market here is bullish over the next two years.

RBS analysts Fera Wirawan and Bryan Lim, for example, project that prime office rents in Singapore will rise by 10 per cent year on year in both 2011 and 2012, supported by robust growth in Singapore's economy.

Credit Suisse similarly expects Grade A rents to grow by 7 per cent next year and 16 per cent in 2012.

'We expect rents to increase due to pent-up demand for office space in line with the global economic recovery, mostly led by business expansions within the banking and financial services industries,' said the bank's analysts in a Dec 13 note.

On top of the potential upside to office rents, the 'risk-reward proposition' in the residential sector has turned unfavourable after two years of outperformance, said CIMB analyst Donald Chua.

All this has led to a strong preference for office stocks among research houses.

Credit Suisse said that it favours City Developments and OUE for their office exposures, among the developers. For the Singapore Reit sector, CapitaCommercial Trust (CCT) and K-Reit Asia are preferred given their larger exposure to the Grade A office space, which tend to lead the office recovery.

DBS Group Research, on the other hand, picked Keppel Land, UOL Group and Singapore Land, which have the largest office content in their revised net asset values. RBS rates Keppel Land and UOL Group as its top 'buys' while CIMB's top picks are Keppel Land and OUE.

In addition to higher rents next year, analysts are also keen on commercial landlords as they expect growth in the capital values of office, retail and hotel properties as investor interest in such properties climbs. 'We expect capital appreciation for office, retail and hotel properties in light of increasing investor interest in such properties,' said RBS. 'Developers and private funds are attracted by rising rents and room rates, as well as cheap financing for properties.'

RBS expects that on top of prime office rental growth of 10 per cent each next year and in 2012, new grade A office capital values will climb to $2,800 per square foot (psf) - a climb of 17 per cent from current values.

RBS also said that efficient capital deployment is key now that most developers are under-leveraged.

For the residential sector, most analysts are still positive about the overall market, but prefer high-end developers.

Credit Suisse said in its report that it was still upbeat on the overall residential market in Singapore on the back of the low interest rate environment, historical high rate of GDP growth and continued population growth.

The bank estimates that overall residential property prices will increase by another 5 per cent each next year and in 2012.

But for those property stocks with significant exposure to the residential sector, the preference is for high-end developers who are seen to be less sensitive to government policies.

'With sales activity largely centred on mass market condos, we believe this will lead to more demand-side and supply-side tightening measures ahead. As such, we are maintaining our preference towards high-end developers, which are less susceptible to policy concerns,' said DMG & Partners Research analyst Brandon Lee.

DMG has 'buy' calls on Wing Tai Holdings and SC Global Developments.

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