OREANDA-NEWS. Three Office REITs – CapitaLand Commercial Trust, Keppel REIT, and Frasers Commercial Trust – have reported their earnings for the three months ended 30 June 2016 over the last two weeks. Another Office REIT – OUE Commercial Real Estate Investment Trust – will report its quarterly results tomorrow.

The Singapore Exchange (SGX) lists 32 Real Estate Investment Trusts (REITs) and six stapled trusts. Three REITs – Manulife US REIT, Frasers Logistics & Industrial Trust and EC World REIT – were listed recently on SGX, on 20 May, 21 June and 28 July respectively. The Global Industry Classification Standard (GICS®) classifies six of the 32 as Office REITs.

According to GICS®, Office REITs comprise companies or trusts engaged in the acquisition, development, ownership, leasing, management and operation of office properties.

The six Office REITs – CapitaLand Commercial Trust, Keppel REIT, Frasers Commercial Trust, OUE Commercial REIT, iREIT Global, and Manulife US REIT – have a combined market capitalisation of S$11.1 billion. In the 2016 year-to-date, they have averaged a dividend-inclusive total return of 19.6%, bringing their one-year and three-year total returns to 7.9% and 15.1% respectively. The six trusts also maintain an average dividend yield of 6.8%.

The newest addition to the group of Office REITs – Manulife US REIT – is a Singapore REIT established with the strategy principally to invest, directly or indirectly, in a portfolio of income-producing office real estate in key markets in the US, as well as real estate-related assets. Its initial portfolio comprises three office properties with an aggregate net lettable area of 1.8 million square feet valued at US$799 million. They consist of Figueroa in Los Angeles and  Michelson in Irvine – both in California, as well as Peachtree in Atlanta, Georgia.

For the quarter ended June 30, 2016, CapitaLand Commercial Trust, Keppel REIT, and Frasers Commercial Trust averaged a 1.1% decline in distribution per unit (DPU) from the year-ago period. Keppel REIT posted the highest YoY percentage growth in DPU of 6.4% to 1.61 Singapore cents, while CapitaLand Commercial Trust showed the lowest growth – up 0.5% YoY to 2.20 Singapore cents.

The three trusts averaged a 1.5% increase in net property income, while gross revenue rose an average 1.1%. 

On average, the three REITs had an aggregate leverage ratio of 35.0% as of the quarter ended 30 June. This compares with an average of 35.1% in the three months ended March 31. Interest cover for the five trusts averaged 5.4 times in the June quarter, compared with an average of 5.5 times in the March quarter.

Among the three trusts, Keppel REIT had the highest aggregate leverage ratio in the June quarter at 39.0%, while CapitaLand Commercial Trust had the lowest aggregate leverage ratio of 29.8%.

The Singapore office market continued to see declines in occupancy and rental rates, given the impending completion of above-average new office supply in the core Central Business District (CBD). Market vacancy rate is expected to rise in the short term, with the completion of new supply over the next six to nine months, CapitaLand Commercial Trust said in its quarterly results statement.

Based on statistics from CBRE, core CBD office occupancy remained steady at 95.1% in 2Q 2016, marginally lower than the 95.2% occupancy rate in the previous quarter, Keppel REIT said in its quarterly results statement. Average Grade A rent was lower at $9.50 per square foot per month, compared with $9.90 psf in 1Q 2016, due to competition from new CBD developments due for completion over the next two years. 

During the June quarter, leasing activities increased, supported by the flight-to-quality move of companies taking advantage of more favourable lease terms, Keppel REIT added. Sectors that contributed to leasing demand included financial and professional services, as well as technology, media and telecoms. Singapore is fast-emerging as Asia’s hub for financial technology – uncertainties from Britain's vote to exit the European Union last month are expected to prompt some UK-based fintech companies to accelerate their move to Asia, with the city-state poised to benefit from this trend.

Lynette Leong, CEO of CapitaLand Commercial Trust Management Ltd, the Manager of CapitaLand Commercial Trust, said the trust's portfolio occupancy rate of 97.2% remains above overall market occupancy rate of 95.1% in 2Q 2016, despite the muted macroeconomic environment and challenging office market conditions. 

"In 1H 2016, we have successfully renewed or signed new leases with high quality tenants, which... leaves only 4% of office leases to be renewed this year and 10% of office leases due in 2017, as we proactively retain tenants and attract new ones," she added in the quarterly results statement.

Low Chee Wah, CEO of Frasers Centrepoint Asset Management (Commercial) Ltd, the manager of Frasers Commercial Trust, noted that the trust's Singapore office properties continued to demonstrate resilience despite the weaker domestic office market outlook and economic environment. 

"Lease expiries for the remainder of this financial year are minimal and are only in the Singapore properties. The well-spread lease expiries of the portfolio will provide income stability to the trust in the long term," he added in the quarterly results statement.

One bright spot remains the Australian office market, which continues to see positive net absorption in 1Q 2016, Keppel REIT said. 

According to Jones Lang LaSalle, overall office occupancy in the CBD remained stable at 87.6% in 1Q 2016, compared with 87.4% in 4Q 2015. In Sydney and Melbourne, office occupancy continued to strengthen to 93.2% and 90.8% respectively in 1Q 2016, up from 92.2% and 90% respectively in 4Q 2015, on positive demand driven mainly by the professional services and education sectors. Improved business sentiment has prompted companies to look beyond the short-term financial market volatility and make long-term strategic real estate decisions, Keppel REIT added. 

The Australian economy grew a further 3.1% YoY in 1Q 2016, after registering 2.5% growth last year. According to the Reserve Bank of Australia, the country is expected to record stable economic growth of between 2.5% and 3.5% for this year.