Office REITs - DBS Research 2022-12-14: A Year Of Two Halves

• Economic headwinds may moderate office growth momentum going into 2023.
• Impact from tech and financial layoffs manageable unless prolonged recession becomes evident.
• Prefer Mapletree Pan Asia Commercial Trust (SGX:N2IU) and CapitaLand Integrated Commercial Trust (SGX:C38U) as key beneficiaries to China reopening. China reopening a game-changer to drive economic recovery, though timing remains uncertain.

Economic headwinds could moderate office rent growth momentum going into 2023.

• Singapore office sector had a good run in 2022 with Grade A Core CBD rent surpassing the pre-COVID high of 2019 (+7.2% in 9M22). As we move into 2023, we expect slowing economic growth to weigh on the office sector.
• The Singapore economy is expected to slow to 2.2% in 2023 from an expected GDP growth in 2022 of 3.5%, dragged mainly by the manufacturing sector, with also the service sector to possibly run out of steam going into 2023.

Tech and financial layoffs may have an impact; manageable, however.

• Since 3Q22, the news has been bombarded with tech – and subsequently financial sector – layoffs. While tech has been aggressively expanding its office footprints in the past few years, it takes up only ~10% to 11% of Singapore CBD office. Assuming it scales back all its expansion, vacancy could rise to 3.9% from current 3.1% as at Sep ‘22, which is still below the historical average of 4.6%.
• On the other hand, the financial sector has been downsizing its office space (-2ppt) while expanding its workforce by 3% to 4% pa. As such, we do not expect major downsizing from the financial sector in the near term. However, vacancy risks will rise if a prolonged recession becomes evident.

Silver lining may keep Singapore office afloat; China reopening a game-changer.

• Singapore is in a unique position to see some support to its office market. Singapore has raised its global rank as a destination for regional headquarters and family offices. There were 700 new family offices set up from 2019 to 2021 and more than 100 new family offices were approved between Jan22-Apr22.
• In addition, China’s reopening could be a game-changer to drive economic growth momentum once again from 2H23 depending on the timing of reopening. We prefer Mapletree Pan Asia Commercial Trust (SGX:N2IU) and CapitaLand Integrated Commercial Trust (SGX:C38U) as key beneficiaries of China’s reopening.
• Continue to read the 17-page report attached below for complete analysis on Singapore office sector.