The Best Office REITs in Singapore

In Singapore, there are 31 real estate investment trusts (REIT) and property trusts. Of these, there a number of REITs that focus on renting out office space. Said another way, these are REITs that own and operate office buildings.

To pick the best office REIT, we might want to start with the key factors that influence the sector. Here are a couple of them which I have picked up from my own study of REITs.

1. The office property cycle

 2015-02 CapitaCommercial Slide

Source: CB Richard Ellis via CapitalCommercial Trust’s Earnings Presentation

Historically, the business of office rental has been volatile.

As shown above, the gross rent per square foot can vary widely across the years. Around the third quarter of 2008, the gross rental rate reached $18.80 per square foot per month, only to fall to a low of $8.00 a little over a year later. From peak to trough, that would be close to a hefty 60% fall.

2015-02 CCT Slide capitacommercial

Source: CapitaCommercial Trust’s Earnings Presentation

The impact of the office rental cycle can be seen at the occupancy rates at CapitaCommercial Trust (SGX: C61U). As you can see from the graph above, the REIT saw a decline in occupancy between 2008 and 2009 as well as between 2011 and early 2013. This looks to be in line with the general market trend.

2. Quality of assets

Not all office buildings are made equal. There can be a big difference in the quality of assets. Take a peek at the office building portfolio for Keppel REIT (SGX: K71U) during the depths of the Great Financial crisis (see below):

2015-02 K-REIT slide keppel reit 

Source: Keppel REIT’s earnings presentation

As you can see, the One Raffles Quay property managed to maintain 100% occupancy at the end of 2008 and 2009. Yet, other properties such as Keppel Towers and Bugis Junction Towers did not do quite as well with their sharp declines in occupancy during tougher times.

Foolish summary

The best REIT in Singapore may be judged by the earnings power of the properties that it owns, the trends which favor it, and the price that we pay for its units.

Of course, there can always be more factors to consider – like the ability of its management to allocate capital wisely when it comes to future purchases or enhancements – and each REIT will offer its own version of pros and cons. But either way, if we can find the best combination, then we may have found our next investment candidate.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.