What has changed?
We have revised up our FY10-12 distribution-per-unit (DPU) forecasts for K-REIT Asia (KREIT) by 2.1-2.6% after adjusting up our occupancy-rate assumptions to 90% for its Singapore-office investment properties.
Impact
We have fine-tuned our lease-renewal profile assumptions for each property following the publication of KREIT’s FY09 annual report.
We have also adjusted up our occupancy-rate assumptions for each of its Singapore-office investment properties to 90% for FY10-12, from 83-86% previously. We have revised up our DPU forecasts by 2.5% for FY10, 2.1% for FY11, and 2.6% for FY12.
Given the significant new office supply due from FY10-12, we believe that achieving a 90% occupancy rate for older office properties on the fringe of the CBD will be a major challenge for landlords. We have not changed our occupancy-rate forecast (of 100%) for One Raffles Quay.
Valuation
Regardless of its asset values, we are not impressed with KREIT’s declining DPU yields, based on our revised forecasts, of 5.3-6.1%.
We have not changed our six-month target price, based on our RNG valuation, of S$0.96, which assumes an effective cap rate of 5.44% for its Singapore-office portfolio.
Catalysts and action
We maintain our 5 (Sell) rating for KREIT and believe CapitaCommercial Trust (CCT SP, S$1.10, 3) and Suntec REIT (SUN SP, S$1.34, 3) offer better value for investors seeking to enter what we regard as the most risky segment of the property sector.
