WITH the COVID-19 pandemic having forced most businesses to evolve, the functionality of offices is likely to embrace a new meaning. Adding to this is the future incoming office space of less than four square metres as tenants emphasis on quality and affordability.
In a nutshell, resumption of economic activity is expected to drive office demand although the recovery pace can be uneven in the short term and would only be meaningful from 2022 onwards, according to UOB Kay Hian Research.
A case in point is how IGB Commercial REIT – a new pure play office REIT – which was listed on Sept 20 closed 14% lower at 61 sen (from its initial public offering price of 71 sen) at its stock market debut.
The company is currently the seventh largest REIT in terms of market capitalisation and the largest pure office REIT around. At the current price, it has a potential dividend yield of 6% for 2021, according to its forecasted dividends in the prospectus.
“Occupancies for offices in our coverage have remained relatively stable throughout the pandemic. Landlords are more willing to negotiate and provide favourable lease agreements as tenant retention is their top priority,” observed analyst Yap Xiu Li in an office REITs review.
“In our coverage, rental relief was minimal, however rental reversion was flat. We expect rental rates to remain depressed amid the incoming office supply and uneven economic recovery.”
Nevertheless, UOB Kay Hian Research expects assets in strategic locations to remain resilient as evidenced by the KLCCP Stapled Group and Sentral REIT’s steady earnings throughout the pandemic.
“However, average rental rates in the Kuala Lumpur City Centre (KLCC) continue to remain under pressure at RM6.90 per sq ft,” noted the research house.
“Although the industry is still grappling with oversupply, we believe selected office REITs (located in strategic locations with good connectivity like KL Sentral) will benefit from higher demand for office space amid the evolving landscape. Moreover, the average rental rates in KL Sentral are attractive at RM6.46 per sq ft.”
Reiterating its “overweight” outlook on the office REITs sector, UOB Kay Hian Research said it prefers Sentral REIT (“buy”; target price: RM1) for its very attractive dividend yield of at least 8% which is sustained by resilient earnings and stable occupancy.
“Sentral REIT’s prime assets, namely Platinum Sentral and Menara Shell (contribute >60% to top-line), are located strategically in KL Sentral with good connectivity,” opined the research house.
“Moreover, rental rates in KL Sentral are attractive and slightly lower than KLCC which would drive office demand.”
Additionally, UOB Kay Hian Research also deems Sunway REIT (“buy”; target price: RM1.55) to be a good proxy, yielding 6% for 2022 as its earnings recovery would be boosted by its retail segment with lower downside risk due to its relatively diversified portfolio. – Sept 22, 2021
