4 compelling reasons behind SREITs' bottoming out

More manageable supply with completions.

According to CIMB, the positive correlation of interest rates with commercial cap rates have not been as straightforward. In the up and down cycles since 1990, commercial property yield spreads have narrowed and widened, driven by industry conditions. 

CIMB believes fundamentals are ultimately the key drivers of cap rates and capital values.

Here's more from CIMB:

We believe a more positive outlook in the office sector will cushion any sharp rise in cap rates. We believe the sector has bottomed for a few reasons.

1) A strong labour market and evolving demand from non-financial sectors continue to provide support for office take-up 

2) A more manageable supply with completions in the CBD from now till 2016 are estimated to average around 0.65m sf per year, lower than the historical average annual take-up of 1m-1.2m sf.

3) Peaking vacancy rates with rents now stabilised, still at 40% below previous peak levels. According to JLL, vacancy rates in the CBD have fallen from 7.1% in 1Q12 to 6.5% in 1Q13, while average CBD rents have stabilised at S$8.90 psf, unchanged from the previous quarter.

4) The ongoing removal of office stock, as the old CBD continues to be rejuvenated, should continue to alleviate the supply situation.

The average office cap rates for Grade A buildings have compressed to about 3.75%, below its historical average of 4.2%. In this QE-induced period, we expect rising interest rates to lead to cap rates reverting to mean levels of 4.-4.25%, implying an expansion of about 50bp.