https://www.businesstimes.com.sg/co...g-counterparts-re-rating-may-face-uncertainty
Valuations for office Reits lag counterparts, but re-rating may face uncertainty
Reits that derive their revenue predominantly from the office sub-sector are trading at over a 50 per cent discount to their book value on average, dragged by weakness from those with overseas assets in the US and Europe.
By comparison, the average price-to-book (P/B) ratio for the S-Reit sector is around 0.7.
While the situation is not as dire for office S-Reits with mainly local assets, they too have been laggards in terms of their trading valuations.
Keppel Reit trades at around a 35 per cent discount to its book value, while others such as OUE Reit and Suntec Reit are currently trading at around half their book value.
Their P/B ratios are below their five-year historic average, and the REITS also trade at distribution yields above their historic mean, Bloomberg data showed.
Darren Chan, senior research analyst at Phillip Securities Research, noted that SIngapore Office REITS are currently trading below the FTSE REIT Index P/B ratio of 0.88 times.
"We think the discrepancy in public market valuations for SIngapore office REITS and valuations of office buildings is justified with the high level of interest costs and weaker outlook", he said.
GCP Global Gabriei Yap noted that office REITS players such as Suntec REIT have seen their discounts widen, even as the sub-sector has been trading at a discount to net asset value for over a decade now.
The muted valuations for local office players come despite stable fundamentals in the sector, unlike the performance of office assets in other countries.
While rents are currently high, market watchers expect further growth to slow going forward.
Maybank analyst Krishna Guha noted that spot rent growth has slowed for Singapore Grade A offices in the CBD. "Supply is currently limited but will pick up towards the end of the year or first quarter of next year," he observed.
Chan from Philip Securities observed that additional office supply of around 2.9M sqft would come later this year, mainly from OIO Central Boulevard Towers and Keppel South Central. "We also expect vacancies to pick up in 2024 with tenants downsizing and more layoffs in the uncertain economic environment," he said.
GCP Global's Yap noted that managers could buy back more shares if gearing permits. He added that managers should also stop "making acquisitions which are marginally positive to DPU but disadvantageous to minority shareholders or burden them minimal margin of safety."
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There the guru Gabriel Yap has spoken: BUY BACK YOUR SHARES.
I add: STOP ISSUING SHARES AND DILUTING. WE ARE NOT BLIND. REITS investors are momentum-chasers and forward looking. Outlook is bad bad bad, more outsourcing, generative AI coming to replacing office human drones! Yet more new office space supply coming on market from SG property bubble!
