Suntec REIT - RHB Invest 2021-09-30: Speed Bumps, But Stay In For The Long Term


Suntec REIT - Speed Bumps, But Stay In For The Long Term

  • The return of tightening measures in Singapore is negative for Suntec City mall, and will likely decelerate its office space-leasing momentum in the short term. That said, we remain positive on the long-term fundamentals of its high-quality office portfolio, and maintain that Suntec REIT (SGX:T82U) remains deeply undervalued.
  • Suntec REIT is trading at a ~30% discount to its book value. BUY, new S$1.72 target price from S$1.76, 22% upside with 6% FY21F yield.
  • Key catalysts: Asset divestments (at a premium to book value) and yield-accretive acquisitions.

Office segment: Long-term outlook still positive.

  • Suntec REIT's Singapore office portfolio occupancy rate (2Q) dipped 1.1ppt q-o-q to 95%, mainly due to UBS moving out. Leasing activity, which showed signs of picking up early this year, is likely to slow down – in light of recent tightening measures that led to work-for-home being the default option (in effect from 27 Sep to 25 Oct). However, we remain positive in our long-term outlook – as highlighted in our 23 Aug thematic report titled Workspace: Today, In Transition, Tomorrow – and expect the REIT to benefit from the ongoing flight to quality.
  • The underlying strength in the office market is evident, with Grade-A core central business district rental rates (2Q) rising 1.0% q-o-q to S$10.50psf/month, marking the first growth since 4Q19, based on CBRE data. 1H21 portfolio rent reversion was positive (+1%), and should remain so for the rest of the year. Similarly, office capital values have held up well, as seen by the robust transaction activity year-to-date, with Suntec REIT itself having divested two office assets – 9 Penang Road (30% stake) and Suntec City strata office units – at 6% and 9% premiums to their latest valuations.

Retail segment: Occupancy rate stabilising, but rental pressure to persist.

  • The outlook for this segment (~20% of Suntec REIT’s income) remains challenging, with more rental rebates likely to be offered in 2H21. We estimate potential rebates (FY21) to be at 3-5% of rental income (ie S$1.5-3m), in addition to short-term rental rate restructuring.
  • Suntec City mall’s occupancy rate improved to 93.9% in 2Q, and management expects this to reach 95% by the year-end. Rental rates, however, may stay under pressure, with reversions likely to be at -10% to -20% (1H: -15.3%).

Asset recycling likely to continue

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2021-09-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.72 DOWN 1.790