This property sector will see the strongest recovery in rents in 2018

CBD rents rose to $9.1 psf/month for the first time in 10 quarters, but pricing worries remain.

Rents of core central business district (CBD) offices hit an inflection point in Q3 and increased 1.7% QoQ to $9.1 psf/month, CBRE data revealed.

According to OCBC Investment Research, this could be a sign that the office sector is poised to see the strongest recovery in rents, driven by improving macroeconomic fundamentals and tapering off of new supply in 2018.

The rental increase was the first sequential uptick in 10 quarters from the cumulative dip of 20.2% from the peak in 1Q15.

However, vacancies trended upwards to 7.5%, signifying flight to quality and continued consolidation amongst tenants.

With that, rental increments could reach of 5-10% in 2018.

"However, negative rental reversions for office REITs are likely to persist in 2018 as rents for leases signed three years ago are still expected to be higher than our spot rents forecast," OCBC analyst Andy Wong Teck Ching said.

Furthermore, the positives of a recovering rental cycle could have already been priced in by the market, with the major office REITs CapitaLand Commercial Trust, Keppel REIT and Suntec REIT offering unattractive distribution yields of 4.7%, 4.8% and 4.9%, respectively, based on Bloomberg consensus’ estimates.

Another key reason for the more positive operational outlook for the office sector is the lower supply coming on stream relative to 2016.

Approximately 808,000 sq ft of office space is expected to enter the Central Area next year. On average, 695,000 sqft of new supply is projected to be added from 2018-2021, which is manageable as the global economy turns around.