S-REITs' office spot rents must climb by 30% in 2013 to commensurate with implied asset values

But will it materialise on the ground?

At current market prices, Maybank Kim Eng's regression analysis suggests that S-REITs’ retail and office spot rents in the central area ought to climb by 7% and 30%, respectively, in 2013 to commensurate with implied asset values.

This is on the back of retail and office rents falling 1% and 2% respectively in 2012.

"We hold the view that this is unlikely to materialise on the ground, ,given that most tenants are feeling the heat from escalating business costs (eg, wages, raw materials) and declining profit margins and cannot envisage sustaining such projected increments."

Here's more from Maybank Kim Eng:

Following the end of the 2008-2009 Great Financial Crisis (GFC), retail and office properties saw prices appreciate 13% and 35%, respectively, in 2010-2012.

But rentals were slow to catch up, increasing only 5% and 18%, respectively. This has in turn caused retail and office cap rates to compress from 5.9% and 4.4% in 2010 to 5% and 3.7% in 2012.

Moving forward, we think it is unlikely that rentals will ever catch up in the near term, given that Singapore’s GDP is expected to grow at only 1-3% this year.

Our interaction with tenants and channel checks also suggested increasingly downward rental pressures on landlords, especially those segments facing diminishing occupier demand.

Limited rental upside means that S-REITs are unlikely to have significant organic DPU growth anytime soon. Consensus estimates pegged growth at modest levels of 5.8% in FY13 and 4.7% in FY14.

In addition, physical asset values have eased in 2012. Apart from industrial properties whose prices registered double-digit growth, as in 2010 and 2011, retail and office prices in the central area slowed to only 2% growth.