Published June 11, 2007

Office properties set to see more price increases

Research firms relook calls and valuations on major landlord stocks


WHILE a new record price of $2,850 per square foot (psf) has recently been set for the Singapore office market, industry players believe that there is still potential for price upsides when it comes to office properties here.

New heights: The record $2,850 psf achieved for an office floor at the Central project above Clarke Quay MRT Station suggests a positive outlook for the commercial space segment in Singapore

In line with this, property analysts here are taking another look at their calls for major office landlords listed on the Singapore Exchange - CapitaCommercial Trust (CCT), City Developments, K-Reit, Keppel Land, SingLand, Suntec Reit and UIC, among others.

On Friday, BT reported that Far East Organization is believed to have sold a floor at the 99-year leasehold Central, above Clarke Quay MRT Station, for $2,850 psf of net lettable area to a Singapore fashion trading company.

But office space seems undervalued when compared with the prices of residential properties, analysts say. At the upmarket Orchard Residences, a few apartments fetched more than $4,000 psf. Also, yields achieved by office properties have been historically higher than those fetched by residential apartments - which suggests that office space should be fetching higher prices as well.

'If residential buildings can sell at such high prices, why can't office buildings?' asked DBS Vickers analyst Wallace Chu. He expects office prices to rise, mirroring hikes in office rents, as supply of office space remains tight.

In Raffles Place, for example, gross rents have increased from $4.30 psf per month at the start of 2005 to $10.60 during the first quarter of 2007, according to property firm Colliers International. Office landlords are widely expected to benefit from both the price as well as rent hikes and research firms are relooking their calls and valuations on relevant stocks.

'We are looking into it because of the news (of Far East's sale) and also because of other factors such as the increase of rental rates,' said Mr Chu, when asked if DBS Vickers will now rerate landlord stocks.

Similarly, in a research note released after BT's report on Friday, UOB KayHian identified K-Reit, CCT, Suntec Reit, Keppel Land and City Developments as key beneficiaries of the increased office prices, and issued an 'overweight' call on the commercial property segment here.

'The outlook for the office segment remains very positive due to its favourable demand-supply dynamics and attractive pricing in comparison to other Asian cities such as Hong Kong, Tokyo and Mumbai,' the note said.