Chart of the Day: Here's proof that office REITs are feeling the pinch of supply pressure

It'll hit them the hardest by 2H16-1H17.

Supply pressure is creeping around the corner for office REITs as DPUs have started to tumble in 2QCY16. Even Grade A office market rents are being affected as prices have dropped 8.7% to S$9.50psf.

According to CIMB, driven by both organic and inorganic growth (One Raffles Place), OUECT continued to outperform. Excluding ORP, organic growth in the NPI of the portfolio was still a strong 15.9% yoy.

That said, 2Q16 rental reversion was slightly negative, with OUE Bayfront (OUEB) recording a negative 0.9% rental reversion. However, average passing rents continued to increase as a result of 1H16 positive rental reversions (OUEB: S$11.84psf, ORP:S$10.33psf).

Occupancy for OUEB was maintained at 98.2% while occupancy at ORP inched up 1.2% pts to 91.8%. CCT’s performance was flattish as lower occupancy at Capital Tower and One George Street was offset by higher associates’ contributions (Raffles City and CapitaGreen).

Here's more from CIMB:

Accordingly, portfolio occupancy slid 0.9% pts qoq to 97.2%. The trust signed c.277k sq ft of leases in the quarter. There was a slight positive reversion, which increased average portfolio rent to S$8.98psf (1Q: S$8.96psf). Meanwhile, capital distributions helped to prop up softer underlying performance by FCOT and KREIT. FCOT’s DPU included a capital distribution of 0.38Scts (c.16% of DPU), which was used to compensate for lower occupancies at China Square Central (certain units affected by construction works).

On the flip side, the trust signed 214k sq ft of new/renewed leases in the quarter, with positive rental reversions ranging from 5.5% to 10.3%. Of note, Microsoft (occupies 7.4% of the property) extended its lease at Alexandra Technopark by another five years to FY22. The office tower of China Square Central continued to enjoy full occupancy while occupancies at 55 Market Street and Alexandra Technopark remained stable at 95.8% and 94.8%, respectively.

For the balance of 2016, we expect office rents to register a similar or even accelerated pace of decline vs. 1H16. With relatively low pre-commitments in Marina One (c.30%), Duo (c.35%) and Guoco Tower (c.20%), we expect the supply overhang to extend into 2017.

Meanwhile, CBD vacancy rate was stable at 5% in 2Q16. However, we expect the vacancy rate to rise sharply to slightly over 10% in the next 6-9 months with the completion of the new developments.

With negative rental reversions starting to be felt, we project the office REITs (excluding OUEHT) to register flat yoy DPU for FY16. In terms of lease expiries, KREIT has a minimal 0.6% of leases due for renewal in 2H16. The expiring rents average between mid-S$8psf and low-S$9psf vs. spot rent of S$9.50psf.