Upside for office Reit sector limited: Credit Suisse

Upside for office Reit sector limited: Credit Suisse

The office real estate investment trust (Reit) hot streak is expected to cool, with CapitaCommercial Trust (CCT) and Keppel Reit pegged at "neutral" in the latest Credit Suisse equity research report.

Suntec Reit, with its larger exposure to older offices, has been rated "underperform".

CCT and Keppel Reit appear set for "moderate rental growth" and were favoured by Credit Suisse for their higher proportions of Grade A offices, at 67 per cent and 92 per cent, respectively.

On Wednesday, CCT and Keppel Reit's counters closed a cent lower at $1.655 and half a cent higher at $1.375, respectively.

The report has a target price on CCT of $1.59 a share and on Keppel Reit of $1.32 a share.

Over much of 2012, the Reit space in general enjoyed a blistering performance in the realm of investor sentiment.

The FTSE ST Real Estate Index, for example, has climbed more than 20 per cent over the last year, compared to the Straits Times Index's (STI) gain of about 10 per cent during the same period.

Even so, enthusiasm for real estate plays has been rather more restrained this year, with the index up only about 2 per cent year-to-date, against the STI's gain of about 4 per cent.

Where office real estate in particular is concerned, demand - which was strong last year - might lack the requisite amount of momentum this year, especially as the noose continues to tighten around labour and hiring, according to the Credit Suisse report.

"We believe the government's tighter labour policies will have an impact on business expansion plans. Coupled with expectations of lower GDP growth as well as the supply outlook, we believe that office demand may remain relatively slow, which means rents are unlikely to rise meaningfully from current levels," it said.

Within the office space sector itself, rental rates in the prime Grade A category are expected to hold up over the next few years - "flat at best" - but the prognosis is slightly gloomier for Grade B and older Grade A offices because of competition from business parks and newer office projects.

The report noted that some older Grade A offices at Suntec Offices fetched monthly rentals at $8.50 to $9 per square foot recently. "We see a potential risk that three years down the line, come the renewals, there could be a risk of tenant departure, or that rentals be lowered given better offerings from the newer office schemes," the report said.

"We also believe that the upcoming South Beach office tower just across from Suntec City completing in 2015 could pose direct competition risk," it added.

Suntec Reit, which closed 1.5 cents lower at $1.88 on Wednesday, was given a target price of $1.56, alongside its "underperform" rating by the report.

While there is a ceiling on upsides for the office Reit sector, distributions could still make it worth the market's while. With an average yield of about 5 per cent, the sector remains attractive, given the "yield-hungry environment", the report said.

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