Here's why office REITs could shrug off dipping rents

REIT prices could react ahead of the bottoming.

With office rents expected to continue spiraling down over the next quarters, real estate investment trust (REITs) can sit back and relax as it has already been well-flagged.

According to a report by Maybank Kim Eng, the market could instead focus on a bottom as rents fall down amidst supply surge in the near term.

"While rents could continue to fall, we think the market could instead focus on a bottom for the sector. We expect rents to bottom over the next 5-6 quarters and REIT prices could react ahead," the report said.

Quoting CBRE data in 2Q16, the report noted that there have been five quarters of decline for Grade A office rents and if this cycle is repeated, rents could bottom over the 12-13 quarters.

"This implies a possible bottoming to around SGD8 psf pm by early 2018, which is consistent with projections of lower supply completions from 2018," Maybank stated.

Maybank cited two REITs, Keppel REIT and CapitaLand Commercial Trust, as top picks, as negative impact on DPUs would be attenuated by their relatively low lease expiry near term.

More so, the tender for the site in Central Boulevard could send a positive signal for the sector assets.

"Fierce competition for the Central Boulevard land tender in the Marina Bay precinct could send a positive signal for office assets as over 70% of the site will be used for offices. Good prices in recent transactions of nearby properties could encourage strong bids," it explained.