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Broker's take: DBS says Singapore office sector near inflection point; upgrades CCT to 'buy'

DBS Group Research on Monday said the Singapore office sector is near an inflection point and upgraded its recommendation on CapitaLand Commercial Trust (CCT) to "buy" from "hold".

It has also raised its 12-month target price on CCT to S$1.95 from S$1.55 previously, riding on the re-rating of CapitaLand Mall Trust due to the merger of both Reits.

DBS's top picks for the sector include Keppel Reit with a price target of S$1.35, and Mapletree Commercial Trust (MCT) with a price target of S$2.25 for the quality of their portfolios and pure plays by asset class and geography respectively.

As at 10.38am on Monday, units in CCT were trading at S$1.84, up S$0.02 or 1.1 per cent, while units in Keppel Reit were flat at S$1.15, and units in MCT were up S$0.03 or 1.4 per cent to S$2.15.

"Despite facing a steep economic recession in 2020, we believe that Singapore's economy is near an inflection point, with the steepest gross domestic product (GDP) contraction expected in Q2," wrote DBS analysts Rachel Tan and Derek Tan in a research note.

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Based on historical trends over the past three recessions, the analysts noted that this period will also coincide with the bottom in both office demand and the share prices of office Singapore real estate investment trusts (S-Reits).

"We believe it pays to be early in our call, given attractive risk/reward ratios for the sector, which is trading at 0.8 time price-to-net asset value, below its historical mean. We believe the sector remains attractive to ride on potential recovery post Covid-19 and any potential share price weakness upon the release of GDP data would be a good entry opportunity," said Ms Tan and Mr Tan.

While economic recovery is projected to be gradual from the second half of this year, the analysts see downside risk mitigated by the lack of new supply completions until 2022.

With projected construction delays, only about 71,000 square feet (sq ft) of new net supply in downtown core will be completed over 2020 to 2022, far less than the supply in previous crises, the DBS analysts said.

"Therefore, we believe the low levels of net incoming supply, coupled with record low vacancies, will mitigate a steeper fall in office fundamentals and set the stage for a faster recovery into 2021 and beyond when the economy recovers," they said.

In addition, the analysts believe that the future of work spaces might not be a clear downtrend as feared.

"While flexible working policies will be core, we do not see a 180-degree pivot towards work-from-home, but a balance will be sought. In fact, we see office S-Reits upping the game by offering flexible workspace to meet their tenants' evolving needs and integrating with sustainability practices," the analysts said.

They added that a near-term supporting factor is demand for more space as firms adhere to safe distancing requirements and business continuity plan needs.

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