Recently, a news from DBS caught our attention and rang some alarm, and we thought we wanted to share our thoughts on the issue.
DBS, the largest bank in Singapore, has shared that it will be surrendering about 2.5 floors of its office in MBFC. This announcement comes after it also announced that it will be cutting down on its space in Hong Kong.
Beyond just DBS,Citigroup is giving up three floors in Asia Square Tower 1, while Mizuho is cutting space equivalent to less than one floor in Asia Square Tower 2.
I think over the next 1 to 3 years, commercial REITs will need to work hard to repurpose their space to be more flexible and to market themselves to the right anchor tenants in order to protect their rental income and to keep their occupancy rate high. Technology and innovation is moving very fast and companies are actively adapting flexible working arrangements, and that give rises to how spaces are used.
What this also means is that the commercial property landscape is actually very volatile and uncertain now. Im not sure if commercial REITs are that attractive as investments now and with interest rates going up, these interest rates will catch up with the balance sheet of companies and the REITs.
Kevin Oleary, also know as Mr Wonderful on shark tank, has recently shared in a live streamed video that his outlook for REIT has turned negative.
As a REIT investor in the US, he has always been allocating >30% of his portfolio into REIT, but has recently moved that percentage down to 8% – a rather big deal for Kevin as he is known for loving cash producing assets.
Kevin shared that people who have had a taste of working from home due to covid 19, are now beginning to want to work from home and demand for office plunged to and all time low, and that will continue to be the case for many years.
For those of you who have time, I really recommend watching this video. Other than commercial reits, Kevin also talks about why we are not in a bubble (because we have very high productivity), how is he only looking at growth companies growing at 30-40% a year, how to take some money off the table (10% off your profits and invest into a robo), how the next consumer companies should have a sustainability mission statement.
So for friends who are investing the commercial REITs, these are all food for thoughts.
Given the risk of a changing office landscape, I’m not sure the returns of commercial reits are that enticing anymore to reward investors – the dividend yield for MCT and CICT is only at 2-4% PA. For these commercial reits to continue growing, it has to borrow money to acquire more buildings – and with interest rates climbing, it will put some downward pressure on the prices.
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