The author is an analyst for NH Investment & Securities. She can be reached at eunsang.lee@nhqv.com -- Ed.
The Seoul office market should remain brisk in 2024. Despite its status as Korea’s largest office REIT player, Shinhan Alpha REIT is showing a 2024E P/NAV of only 0.6x. But, we believe that the REIT’s share price is set to escape downward pressure, noting that it is enjoying boosted rental income and is soon to pay out special dividends.
Seoul office market to remain brisk in 2024
Reiterating a Buy rating, we raise our TP for Shinhan Alpha REIT by 4% from W7,300 to W7,600, reflecting increases in our rental income estimates amid tight office supply. The firm’s AUM is estimated at W2.6tn, making it the largest office REIT player in the country. As of Nov 2023, the office vacancy rate in Seoul came to 2.7%, a level below the natural vacancy rate of 5%. We attribute this low figure to an office supply shortage. This year’s office supply should also prove limited, given that PF and construction cost issues remain unresolved.
Tight office supply bodes well for REITs that incorporate into their asset portfolios the buildings for which construction has already been completed, and pay out dividends to shareholders based upon rental income. REITs can now actively push up their rent fees and enjoy a rise in the appraised values of their assets. Shinhan Alpha REIT’s 2024E P/NAV comes to 0.6x, standing below the 1.0x for Samsung FN REIT and Hanwha REIT.
Share price to escape downward pressure
Shinhan Alpha REIT is set to pay out sizable special dividends in 2024 following the sale of The Prime Tower in Yongsan in Aug 2023. Nevertheless, its shares have been faring ill as of late on: 1) an inevitable drop in rental income in the wake of the asset disposal; and 2) the time gap between the property sale and special dividend distribution. However, the REIT has boosted its rental income by incorporating a HSBC building into its asset portfolio in Nov 2023, and a special dividend distribution is expected within the next three months. We see 2024E DY (including special dividends) of around 12%. We maintain Shinhan Alpha REIT as our sector top pick for 2024.