Hong Kong, Singapore office REITs live on in post-virus world

The outlook for Singapore and Hong Kong offices is promising.- AFP

HONG KONG (Bloomberg): The office may never reach its past heights in the post-pandemic world but the outlook for Singapore and Hong Kong offices is promising.

Relatively small homes in those cities, short commutes to work and new tech firm tenants bode well for property trusts that focus on those markets.

Domestically focused real estate investment trusts in these hubs have outperformed their peers in Australia and Japan this year, and continue to rise on the back of a rotation to economically sensitive stocks.

Hong Kong’s Champion REIT, whose tenants include Citigroup Inc, Singapore’s Keppel REIT and Mapletree Commercial Trust have beaten baskets of equally weighted trusts in Australia and Japan, according to Bloomberg-compiled data.

To be sure, no one expects Singapore and Hong Kong offices to be unscathed from the pandemic.

Companies like Citigroup and Mizuho Financial Group Inc in Singapore and Macquarie Group Ltd. in Hong Kong are giving up office space as demand wavers and they confront a future of some remote work.

Singapore’s vacancy rates have already risen to 4.9 per cent in the third quarter from 3.3 per cent a year earlier, while that for Hong Kong’s Grade A office spaces was up at 9 per cent in September from 6.1 per cent over the same period last year, according to data from Colliers International Group Inc.

But these cities have kept the virus under relative control. Homes are also too small to make a permanent work-from-home future viable, while unlike London or New York, these cities don’t have a significant hinterland of suburbs where workers can flee to.

That’s probably why their REITs are just about 13 percentage points from erasing losses this year while Australian and Japanese office REITs are down an average of 24 percent.

Singapore in Pole Position

Singapore’s office market is likely “in one of best positions” globally because living spaces are small, supply is tight, and tech companies are increasingly looking to the country for office space, said Shern-Ling Koh, a portfolio manager at Principal Real Estate Investors.

He said after Singapore’s office REITs, he likes that of Hong Kong’s and then Tokyo’s, in that order.

Billionaire Ray Dalio is the latest to plan a family office in Singapore to run investments and philanthropy.

“These incoming office space users from these newer industries should offset what Singapore may lose in others, ” said Yoojeong Oh, a Singapore-based fund manager at Aberdeen Standard Investments Asia Ltd.

Meanwhile, the Hong Kong Special Administrative Region is drawing Chinese mainland firms in, partly due to a boom in initial public offering activity.

TikTok owner ByteDance Ltd. and Alibaba Group Holding Ltd. have signed leases to add office space in Hong Kong, while CMB International Capital Corp. is among finance firms expanding their presence in the world’s priciest property market.

Plans announced this week by the government to cut stamp duties should also bolster deals in the city’s commercial property market.

It helps that REITs in these two cities are relatively cheap, while offering attractive dividend yields, especially when compared with bond yields.

Analysts estimate Keppel REIT and Mapletree Commercial will yield 5.4 per cent and 4.1 per cent for the 2021 fiscal year, respectively, while Champion REIT will offer 5.3 per cent.

That outstrips the less than 4 per cent yield of Japan’s biggest trusts such as Nippon Building Fund Inc, though they are lower than the 7 per cent at Australian REITS like Centuria Office REIT and Australian Unity Office Fund, where share prices have plunged.

Keppel shares rose 1 per cent on Friday, while Mapletree Commercial and Champion were down 0.5 per cent and 0.9 per cent, respectively.

“Remote working will remain prevalent for some time, but the long-term demise of the office is an illusion and it’s a good time to buy office REITs in Singapore and Hong Kong, ” said Joachim Kehr, portfolio and regional manager for Asia Pacific at Centersquare Investment Management LLC.

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