For the office sector, year-on-year (yoy) revenue showed greater improvement than quarter-on-quarter (qoq) revenue because of positive rental revision of leases that were renewed over the period. The 13.2% qoq improvement in Frasers Commercial Trust was due to contribution from a new property and also favourable exchange rate movement. Office leases typically have lease periods of one to three years and leases that were renewed in the recent period came from a low base previously, thereby there is still some degree of positive reversion.

The URA rental index has come down 26.6% from its peak in 2Q2008. Although the office sector is still showing signs of weakness, rate of decline has slowed down. On the other hand, vacancy rate has also crept up to 12.2%. The retail sector showed a similar trend as the office sector, except for smaller variability in the revenue, which suggests more resiliency than the latter. Anecdotal evidence from the results of Fraser Centrepoint Trust and CapitaMall Trust indicated that suburban malls perform better than downtown malls. Fraser Centrepoint Trust, which has assets located in the heartland areas, showed better yoy and qoq improvement compared to CapitaMall Trust, which has a greater presence of its portfolio located at the core downtown area. Suntec REIT results were partly affected by its office portfolio, which contributed 46% to revenue.


OFFICE RENTAL INDEX




The rental index for retail sector has remained relatively stable compared to the office and industrial sectors, with a decrease of 7.6% from its peak. Vacancy rate is at an all-time low of 6%. Except for Mapletree Logistic Trust which had a 10.4% increase in yoy revenue that was boosted by contributions from acquisitions, the industrial sector shows little variability in core rental revenue both on a yoy and qoq basis. Occupancy rate for the listed Singapore Real Estate Investment Trusts (S-REITs) has also maintained at a high level of close to full occupancy. The stable revenue is premise on the typical longer lease terms of industrial properties and also the step-up component built into the leases. The URA rental index shows that 3Q2009 reading has came off 16.8% from its peak in 3Q2008 while vacancy rate is approximately 8%.


RETAIL SECTOR INDEX



The hospitality sector shows great contrast between the yoy and qoq revenue. This is likely to be expected as hospitality properties such as hotels and service apartments have very short-term contracts with their tenants and are very dependent on the economic cycles. We can observe that qoq revenue has shown positive improvement compared to the decline observed for yoy revenue, indicating that the worst period for the sector is probably over. Tourist arrivals and hotel occupancy also saw their first month of positive yoy increase for this year in September. The healthcare sector has stayed defensive and is not subjected to the cyclical nature of the economy.

Office sector bottoming out

On the overall, we believe the rental market for the office market could be bottoming and should begin to recover in the second half of 2010, premised by our observations in earlier reports that the rental index tends to drop by approximately 30% from its peak over a peak-trough cycle.

The retail sector appears to be holding up quite well and as the population is decentralizing to the suburban areas, there will be demand for retail spaces in these areas. We believe the rental index for industrial sector could still face a downward trend, however occupancy should be well supported.

The hospitality sector namely the tourism industry has already shown signs of turning around and should continue to pick up as the economy improves further. In conclusion we have a bullish view on the hospitality, healthcare and retail sectors, neutral on the office sector and bearish on the industrial sector.

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©     2006 Phillip Securities Research Private Limited.

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