Office Property Sector - M+S injection into office pipeline (OCBC)

Maintain Overweight

Previous Rating: Overweight

More M+S details revealed. M+S Pte Ltd announced it would develop two integrated projects at Marina South and Ophir-Rochor. UEM Land and Mapletree Investments would oversee the marketing and development of the Marina South project, whereas UEM Land and CapitaLand would similarly oversee Ophir-Rochor. The minimum requirements of 60% and 40% office components for the Marina South and Ophir-Rochor developments, respectively, translates to a combined injection of at least 268,610 sqm of office GFA into the supply pipeline. The Marina South project would add at least 204,600 sqm of office space and is slated for completion by mid-2016; the Ophir-Rochor would contribute at least 64,008 sqm. Note that these two projects alone would add the equivalent of 73% of total CBD office supply currently expected for FY12-14.

Increased visibility for CBD office pipeline. Before 2Q11, we believe there was a lack of visibility for the CBD office supply pipeline beyond 2013. This situation was somewhat alleviated in Apr 11 when CapitaLand and CapitaCommercial Trust announced the redevelopment of Market Street Carpark into a Grade A office tower with 82,400 sqm GFA by 2014. Then in early Jun 11, URA included, on its 2H11 GLS reserve list, a white site at Marina View/Union St that could yield potentially 101,400 sqm of prime office GFA by 2016. Now with the additional clarity for the M+S Marina South project, we think any perceptions of limited CBD office supply pipeline beyond 2013 are likely dispelled and this could have a moderating effect on the sector.

Moderating tailwinds for Grade A office space. We foresee continued tailwinds for Grade A office space underpinned by steady economic fundamentals, an increasing rental gap between Singapore and Hong Kong, and a flight to quality office space. This positive trend may moderate, however, going forward due to the expectations of increased supply ahead. Our thesis is corroborated by the latest 2Q11 data - rental growth for Grade A office space in the Raffles Place/New Downtown micro-market slowed to 7% QoQ in 2Q11 from 8% in 1Q11. The overall average occupancy rate for Grade A CBD office space also fell to 93.5% in 2Q11 from 94.2% in the last quarter.

Buy UOL. UOL remains our top pick given the potential to replenish residential land-bank in a softening acquisition environment and diversified exposure to a buoyant hotel sector. With $376.8m in cash at a net gearing of 34% (as of 1Q11), we believe there is ample gunpowder for acquisitions ahead. Maintain BUY with a fair value of $5.57 (20% discount to RNAV).