Broker's take: CGS-CIMB expects slower Singapore office leasing momentum in Phase Two

CGS-CIMB said on Thursday it expects slower leasing momentum in the office rental sector due to a weaker macroeconomic backdrop, even as viewing activities resume in Phase Two of Singapore's "circuit-breaker" easing.

Analyst Lock Mun Yee forecast overall office rents to decline between 5 per cent and 10 per cent this year, compared to a previous forecast of a 0-5 per cent drop.

"Office tenants would likely remain cautious on any expansion plans as they assess the impact of Covid-19 on their businesses," she wrote in a research note.

Ms Lock has forecast an annual net absorption rate of 500,000 - 700,000 square feet (sq ft) for the year, lower than 2019's 1.7 million sq ft.

She also projected a vacancy level of 11.3 per cent by end-2020 on slower leasing demand, combined with 1.9 million sq ft of new completions expected this year.

"Although existing buildings are likely to experience longer frictional vacancy periods, we believe they should fare better than newbuilds as tenants are likely to renew their existing leases rather than incur capex to fit out a new premise in the near term," Ms Lock said.

She added: "Delays in construction activities may push back completions in the near term, which may help mitigate some of the projected rental declines."

Meanwhile, any longer-term changes to the office rental market post-pandemic are likely to occur gradually, Ms Lock said.

These changes include a new workplace ecosystem incorporating offices, homes and alternative workspace options, as well as a shift to "de-densify" offices as companies reassess their business continuity plans.

"We do not expect these changes to happen overnight," she wrote.

Ms Lock maintained an "overweight" call on the Singapore property sector "on valuation grounds, and in view of the prolonged low interest rate environment".

CGS-CIMB's top picks for the sector are pure plays Keppel Reit and CapitaLand Commercial Trust, which have minimal lease expiries this year and high portfolio occupancies. These two real estate investment trusts are expected to enjoy flat to slightly positive rent reversions for the rest of the year.