Here's why outperforming office REITs are in for a correction in 2015

Vacancy will become a real concern.

The office REIT sector is in for a disappointment this year after outperforming the Singapore market over the past 12 months.

A report by Nomura revealed that the market’s complacency on the office REITs could be tested by five potential disappointments in the next 12 months, namely, increasing vacancy in FY16, lower-than-expected yield accretion from new offices and lower-than-expected returns on asset enhancement initiatives (AEIs).

There are concerns over FY16F vacancy for CapitaCommercial Trust, Suntec REIT and Keppel REIT on news of tenants giving back space.

"On our estimates, tenants in the banking and financial services sector account for c.30% of all leases expiring in FY16F amongst the three office REITs we cover. We think it is likely for some of these tenants to give back space or even move out considering the over 3mn sq ft of new office space scheduled for completion in 2016F, and such news could start to surface in 2015 in our view," the report stated.

For CapitaCommercialTrust, Nomura noted that CapitaGreen’s overall effective passing rent could be below targeted levels of $12-14psfpm, as well as lower-than-expected yield accretion from its potential purchase of the remaining 60% of CapitaGreen, and lower-than-expected return from potential Golden Shoe Car Park redevelopment.

Suntec REIT is particularly at risk from lower-than-expected return on Suntec City Mall’s asset enhancement initiatives.

"Following office REITs' outperformance in 2014 and with average yield now close to -1SD, we believe the market's
complacency on the sector could be tested by five potential disappointments in 2015. While the market remains largely positive on the Singapore office market and office REITs, we remain cautious on the sector. Our TPs for office REITs are on average 7.5% lower than consensus," the report noted.