Singapore Office REITs

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1 Singapore Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 9 Nov 2016 Bullish signal from developers Central Boulevard office sold on implied price in excess of S$3,000 per square foot on a gross development basis Signals confidence on outlook for the Singapore office market Singapore office REITs undervalued given high land prices and construction costs Top pick Keppel REIT (BUY, S$1.23 TP) Record bid for land site. The Central Boulevard site was keenly contested given that it allows the development of up to 1.52m square feet (sqft) of commercial space post the near term jump in supply. IOI Properties placed the highest bid with a record price of S$2,569m, which translates to S$1,689 per sqft of gross floor area (GFA). This is higher than the S$1,409 per sqft paid by Macquarie for the Asia Square 1 site in Both overseas and Singapore developers bullish on Singapore office. Assuming a Premium Grade A office tower with 5,000 square metres (sqm) of retail GFA is constructed, we estimate the breakeven cost for IOI Properties to be between S$2,780-2,942 per sqft of net lettable area (NLA). On a gross development value basis assuming a 10% development margin, the implied price per sqft of office NLA is S$3,090-3,275. While some investors may dismiss IOI Properties bid given it is a foreign developer, bids by developers with extensive experience in Singapore such as Mapletree, CapitaLand, Hongkong Land and Cheung Kong, indicate they remain bullish on the Singapore office market. Their bids implied S$2,500-$2,900 per sqft of NLA on a completed basis, consistent with recent market transactions including purchases made by sovereign wealth funds and existing valuation of various properties owned by the office REITs. Office SREITs trading below replacement costs. Beyond the bullish signal by developers on the medium outlook for the Singapore office market, the bids made including those submitted by developers who manage various SREITs, demonstrate the mispricing and undervalued status of the office REIT sector. The Singapore portfolios of various office SREITs are trading at an implied price per sqft (by NLA) of between S$1,900-S$2,450. This is significantly below the S$3,000 per sqft implied from IOI Properties bid and replacement costs of c.s$2,800 per sq ft. Thus we retain our overweight call on the sector with Keppel REIT (KREIT; BUY, TP S$1.23) as our top pick. We like KREIT given it has the least tenancy risk among the office SREITs, with no leases up for renewal in 2016 and only 5% due to expire in In addition, its Singapore office portfolio which is the most comparable to buildings in recent market transactions and the proposed office block on the Central Boulevard site trades at a substantial discount, at an implied price of c.s$2,450 per sqft. STI : 2, Analyst Mervin SONG CFA Derek TAN mervinsong@dbs.com derektan@dbs.com STOCKS Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 8 Nov 2016 Implied price per sqft of NLA for Singapore portfolio on completed basis REIT Price (S$) Total attributable SG NLA (m sqft) Implied psf (S$) Central Boulevard Site n/a 1.2 3,090-3,275 IOI Properties bid CCT ,917 KREIT ,450 OUECT ,423 Suntec ,256 *Calculated as EV less value of non Grade A office properties divided by attributed property Source: Bloomberg Finance L.P., Various SREITs, DBS Bank Record price for land price per sqft of GFA Source: URA, Press reports, DBS Bank Price Mkt Cap Target Price Performance (%) S$ US$m S$ 3 mth 12 mth Rating CapitaLand Commercial Trust , (0.3) 13.9 BUY Frasers Commercial Trust (2.9) BUY Keppel REIT , BUY OUE Commercial HOLD Suntec REIT , (1.8) 2.5 HOLD S$ per sqft 1,800 1,600 1,400 1,200 1, ed-js / sa- YM, PY

2 IOI Properties places the highest bid for Central Boulevard URA announced that it received seven bids for the Central Boulevard site with the highest bid submitted at S$2,569m by Wealthy Link Pte Ltd, a subsidiary of IOI Properties, a Malaysian property developer. The second highest bid was made by Mapletree Trustee Pte Ltd, 16% lower at S$2,207m. The implied price per sqft of GFA for the highest bid works out to be S$1,689 which is a record price for a Government Land Sale site and higher than the S$1,409 per sqft paid by Macquarie Global Property Advisors for the Asia Square 1 site in September In addition, the bids received far exceeded initial price expectations of between S$1,000 to S$1,200 per sqft of GFA. Overview of Central Boulevard land parcel The Central Boulevard land parcel has a maximum GFA of 141,294 sqm (1.52m sqft) with a minimum office component of 100,000 sqm (1.1m sqft) and maximum retail space of 5,000 sqm (53,820 sqft). The remaining GFA can be used for additional office, hotel, serviced apartments and/or residential uses. The land parcel sits on a 99 year leasehold site. Implied price per sqft of NLA in excess of S$3,000 Based on a Premium Grade A office tower with 5,000 sqm of retail GFA, we estimate the break even cost for the project to range between S$2,224-2,353 on per sqft of GFA or $2,780-2,942 on a per sqft of NLA. This is based on the following assumptions: (1) construction costs for a prestige CBD office of S$ per sqft according to Rider Levett Bucknall (excludes professional and legal fees), (2) 3% cost of funds, (3) 60% leverage, and (4) four year construction period. Assuming a development margin of 10% and 5.5% cap rate for the retail component, we estimate the List of tenderers and bid prices Ranking Tenderer Tendered Sale Price (S$m) Tendered Sale Price in S$ per sqft of GFA implied cost per sqft for the office NLA to be between S$3,090-3,275 on a gross development value basis. For the second highest bidder Mapletree Trustee Pte Ltd, we estimate the breakeven cost of S$1,969-2,098 per sqft based on GFA and on a completed basis; implied office NLA is S$2,727-2,911 per sqft. Undervalued office REITs trading below replacement costs In our view, the bid for Central Boulevard site, supports the valuations of Grade A office buildings in Singapore and highlights the undervalued status of the office SREITs which are trading below replacement cost. The Singapore portfolios for the various office SREITs currently trade at an implied price of between S$1,900-2,450 per sqft of NLA versus IOI Properties estimated breakeven cost of S$2,780-2,942. While investors may dismiss IOI Properties bid as an anomaly, given it is a foreign developer, the bids made by Mapletree, CapitaLand, Hongkong Land and Cheung Kong, experienced operators in Singapore, signal their confidence in the Singapore office market and sustainability of Grade A office values at around S$2,700 per sqft of NLA. Thus, we believe investor scepticism over the value of Singapore Grade A office buildings is unwarranted and we maintain our overweight status on the office sector. Our top pick remains KREIT (BUY, TP S$1.23) given it has the least tenancy risks among the office SREITs, with no leases up for renewal in 2016 and only 5% due to expire in In addition, its Singapore office portfolio which is the most comparable to buildings in recent transactions and the proposed office block on the Central Boulevard site trades a substantial discount, at an implied price of c.s$2,450 per sqft. Breakeven costs for office NLA (S$/sqft) Implied S$ per sqft of completed NLA Low end High end Low end High end 1 IOI Properties 2,569 1,689 2,780 2,942 3,090 3,275 2 Mapletree Investments 2,207 1,451 2,461 2,623 2,727 2,911 3 Nashan Group 2,187 1,438 2,444 2,605 2,707 2,891 4 Hongkong Land & Cheung 2,126 1,398 2,390 2,552 2,646 2,831 Kong 5 CapitaLand & Great Eagle 2,005 1,318 2,283 2,445 2,524 2,708 Group 6 Yanlord 1,985 1,305 2,266 2,427 2,504 2,688 7 OUE Limited, Guangzhou R&F Properties and Tang City Properties Source: URA, press reports, DBS Bank 1,910 1,256 2,199 2,361 2,429 2,613 Page 2

3 Singapore office REITs Estimated development costs and implied price per sqft for office component for IOI Properties bid Low end High end Highest bid by IOI Properties (S$m) 2,569 2,569 Land price (S$/sqft) (A) 1,689 1,689 Maximum GFA (sqft) 1,520,874 1,520,874 Construction costs - prestige office (S$/sqft) (B) Gearing on project 60% 60% Interest rate 3.0% 3.0% Interest expense over 4 years (S$/sqft) (C) Total development costs per GFA (S$/sqft) (D = A + B + C) 2,224 2,353 Total development costs per NLA (S$/sqft) 2,780 2,942 Development margin 10% 10% Development profit (S$/sqft) (E) Total gross development value (S$/sqft) (F = D + E) 2,446 2,589 Total gross development value (S$m) (L) 3,720 3,937 Maximum retail GFA (sqft) 53,820 53,820 Maximum retail NLA (sqft) (G) 34,983 34,983 Retail rents (S$/sqft/mth) (H) Retail property NPI margin (I) 68% 68% Retail cap rate (J) 5.50% 5.50% Value of retail component (S$m) (K = G H I 12 J) Value per retail NLA (S$/psf) 2,671 2,671 Value of office component (S$m) (M = L K) 3,627 3,844 Maximum office GFA (sqft) 1,467,055 1,467,055 Potential office NLA (sqft) (N) 1,173,644 1,173,644 Implied Office per NLA (S$/psf) (O = M N) 3,090 3,275 Source: Rider Levett Bucknall, URA, DBS Bank Page 3

4 Particulars of Central Boulevard land parcel Site Area Allowable Development Maximum Gross Floor Area (GFA) Maximum Building Height Strata Subdivision Lease Period Floor plate size Project completion period Source: URA, DBS Bank Central Boulevard location 10,868.7 sqm / 116,990 sqft White site 141,294 sqm / 1,520,874 sqft Office: Minimum 100,000 sqm / 1,076,390 sqft Retail (shops, restaurants and ORAs): Maximum 5,000 sqm / 53,820 sqft The remaining GFA can be used for additional office, hotel, serviced apartments and/or residential uses Low rise zone: 35m Mid-rise zone: 160m High-rise zone: 245m The whole development, excluding the GFA for hotel and/or serviced apartments and/or residential use, is to consist of no more than 3 strata lots 99 years One tower with 3,000 sqm floor plate or two smaller towers 84 months Source: URA, DBS Bank Page 4

5 Singapore office REITs Previous land sales Date Property/Site Land tenure GFA (sqft) Total land price Price per Developer (S$m) sqf (S$) Nov-2016 Central Boulevard 99 year leasehold 1,520,874 2,569 1,689 IOI Properties Nov-2015 CPF Building 99 year leasehold 606, ,032 Ascendas-Singbridge expirying 2067 Aug-2013 Frasers Tower (Expected 99 year leasehold 830, ,112 Frasers Centrepoint Limited completion in 2018) Sep-2011 SBF Center 99 year leasehold 353, Far East Organisation Nov-2010 Guoco Tower 99 year leasehold 1,697,876 1,708 1,006 Guocoland Dec-2007 Asia Square 2 99 year leasehold 1,222, Macquarie Global Property Advisors Sep-2007 Asia Square 1 99 year leasehold 1,432,890 2,019 1,409 Macquarie Global Property Advisors Sep-2007 South Beach 99 year leasehold 1,580,431 1,689 1,069 City Developments, Dubai World and Elad Group Aug Anson 99 year leasehold 252, Firstoffice Jul-2007 Mapletree Anson 99 year leasehold 383, ,021 Mapletree Jul-2005 MBFC 99 year leasehold 4,714,588 1, Keppel Land, Cheung Kong and Hong Kong Land Source: URA, Press reports, DBS Bank Upcoming office supply Office (CBD) Location Developer Estimated NLA (sqft) Property Type 2016 Guoco Tower Peck Seah Street Guocoland 890,000 Leasing EON Shenton Shenton Way Roxy Pacific Holdings 101,045 Strata Sale SBF Center Robinson Road Far East 353,480 Strata Sale DUO Tower Rochor Road M + S 570,475 Leasing GSH Plaza Cecil Street GSH/TYJ/Vibrant/DB2 282,000 Strata Sale OUE Downtown 1 Shenton Way OUE 50,000 Leasing 2,247, Marina One Marina Bay M + S 1,876,000 Leasing UIC Building Shenton Way UIC 278,000 Strata Sale Oxley Tower Robinson Road Oxley Consortium 112,000 Strata Sale Robinson Robinson Road WyWy Developments 70,000 Strata Sale 2,299, Ex International Factors Building Robinson Road Tuan Sing 194,380 Strata Sale and Robinson Towers Frasers Tower Cecil Street Frasers Centrepoint Limited 645,000 Leasing 858, Funan North Bridge Road CapitaLand Mall Trust 204,000 Leasing 204, CPF Building Shenton Way Ascendas-Singbridge, 500,000 Leasing Mitsui and Tokyo Tatemono 500, Golden Shoe Market Street CapitaLand Commercial Trust 800,000 Leasing Central Boulevard Marina Bay IOI Properties 1,170,000* Leasing 1,970,000 * Maximum potential NLA but may be smaller due to incorporation of service apartments or residential units into the development Source: URA, Corporate Locations, CBRE, various REITs and corporate, press reports, DBS Bank Page 5

6 Average new supply over in line with average between ,500 2,000 1,500 1, '000 sqft S$ psf pm Post GFC average: average: 1.15m sqft ,000 Net supply: Downtown Core (LHS) 1,500 CBRE Grade A office rents (RHS) Source: CCT, CBRE, URA, Various Pres reports, CCT, DBS Bank Net demand: Downtown Core (LHS) 2.0 Recent office transactions Date Property Location Land tenure Net Lettable Price ($) Price per NLA (S$) Area (sq ft) Aug-14 Equity Plaza Raffles Place 74 years remaining 252, ,000,000 2,181 Jul-14 Anson House Tanjong Pagar Area 82 years remaining 76, ,000,000 2,252 Sep-14 MBFC Tower 3 Marina Bay ,327 1,248,000,000 2,790 Jan-15 AXA Tower Tanjong Pagar 66.5 remaining (2015) 675,000 1,170,000,000 1,733 Jun-15 One Raffles Place Raffles Place 99/FH 600,000 1,429,166,667 2,382 Nov-15 CPF Building 79 Robinson Road 99 LH (2067) 324, ,000,000 1,698 May-16 Remaining 60% interest in CapitaGreen Raffles Place 57 remaining expiring 31Mar ,122 1,600,500,000* 2,276 (2,700 assuming 99 year leasehold) May-16 Straits Trading Building 9 Battery Road 999 LH 158, ,000,000 3,524 Jun-16 Asia Square Tower 1 Marina Bay 99 LH from ,200,000 sqft office & 40,000 sqft retail *Based on 100% equity interest Source: Various press reports, DBS Bank Office properties reported to be on the market and asking prices 3,400,000,000 2,668 Date Property Location Land tenure Net Lettable Asking Price ($) Price per NLA (S$) Area (sq ft) Jun Robinson Road (Ex 77 Robinson Road 99 LH from , ,000,000 1,961 SIA building) Jun-16 50% stake in Capital 23 Church Street 99 LH 332, ,000,000 2,500 Square Jun Robinson Road 110 Robinson Road 22,123 45,000,000 2,034 Source: Various press reports, DBS Bank Page 6

7 Singapore office REITs Office SREIT peer comp REIT FYE Price Rec Target Price Mkt Cap Current Price P/Bk (x) (S$) (S$) S$'m FY16/17F FY17/18F FY16/17F FY17/18F Office CCT Dec 1.56 BUY , % 6.0% FCOT Sep 1.33 BUY , % 7.4% KREIT Dec 1.09 BUY , % 6.0% OUECT Dec 0.70 HOLD % 7.5% Suntec Dec 1.67 HOLD , % 6.0% Source: Bloomberg Finance L.P., DBS Bank Page 7

8 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 9 Nov :53:38 Dissemination Date: 9 Nov :36:34 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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9 Singapore office REITs ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 9 Nov 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in CapitaLand Commercial Trust, Frasers Commercial Trust, Keppel REIT, Suntec REIT recommended in this report as of 30 Sep DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. 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