Oversupply Looms In S’pore Office Sector: Citigroup

Source: The Business Times, November 28, 2007

It downgrades two stocks with key exposure to sector - KepLand, CityDev

SINGAPORE is in danger of seeing an oversupply of office space from 2010 onwards, Citigroup is warning.

The bank’s research unit has also downgraded two Singapore stocks with significant exposure to the office market here - Keppel Land and City Developments.

‘The market is underestimating the potential supply of new office space in 2010 and beyond, in our view,’ said Citigroup analyst Wendy Koh in research report dated Monday.

‘Based on our estimates, occupancy rates are likely to peak in 2008-09 and decline thereafter with the impending supply.’

Since May 2007, six new sites with a total gross floor area of 5 million sq ft have been awarded amidst fears of an office space crunch. These sites could add some 3 million sq ft of new office space in 2010-11, Citigroup estimates.

Altogether, on average, 3.2 million sq ft of new supply could hit the market from 2010-12, the bank said. This compares to a historical average demand of 1.5 million sq ft per year.

Supply estimates could rise even further with more government land sales in the first half of 2008, Citigroup said.

All this will mean that buildings in core Central Business District will be competing for tenants.

Key projects that are scheduled to be completed in 2010-12 include Marina Bay Financial Centre, the redeveloped Ocean Building One Financial Centre and the South Beach Road and Marina View land parcels.

In response, Citigroup downgraded its ratings on office landlords Keppel Land and City Developments.

Keppel Land was downgraded to a ’sell’ from a ‘hold’, while CityDev was rated a ‘hold’, from a ‘buy’ previously.

‘Going forward, we expect Keppel Land to face keen competition while marketing the remaining space at the Marina Bay Finance Centre and One Financial Centre,’ Ms Koh said. She cut KepLand’s revalued net asset value (RNAV) estimate to $7.83 (from $8.85) and target price to $6.26 (from $8.97).

For CityDev, Citigroup cut its RNAV estimate to $14.47 from $15.28 and target price to $15.90 from $18.00 to reflect lower capital values of office buildings.

Other analysts however said that all the new projects coming onstream will not cause an oversupply - rather, they will ensure that supply catches up with demand.

‘I think that there will be significant pent-up demand for office space that will only be satisfied when supply hits the market in 2010-11,’ said Moray Armstrong, CB Richard Ellis’ executive director for office services.

This pent-up demand means that demand in 2010-11 will be significantly higher than the historical average, Mr Armstrong said.