Suntec REIT’s Marina Bay Office Assets

Suntec REIT’s Marina Bay Office Assets To See 2-digit Rental Reversion

SINGAPORE – UBS analyst Michael Lim expects Suntec REIT to witness double digit rental reversion for its Marina Bay office properties, while its Suntec City office assets could see at best a modest positive rental reversion due to high expiring office rents there, reported The Edge on Thursday morning (23 June, SGT).

Year-to-date, units of Suntec REIT have increased by about 11 percent the 7 percent in retail stocks in Southeast Asia as a whole.

The trust’s higher unit price, which comes as COVID-19 curbs are relaxed and economies reopen, also exceeds the benchmark Straits Times Index (STI) by 11 points and the Singapore REIT (S-REIT) index by 17 points.

“At 5.6 percent, the dividend yield is currently at -0.5 standard deviation below the mean. Yield spread to 10 years (10Y) is tighter at -1 standard deviation below the mean and has reverted to pre-COVID levels. While reopening tailwinds could continue, we think it is more than priced in,” explained Lim.

“While reopening tailwinds could continue, we think it is more than priced in,” he added.

However, the UBS analyst has downgraded Suntec REIT to “sell” from “buy” as he thinks the trust is most exposed to increasing funding costs among the counters the research house covers.

Lim has also slashed his target price on Suntec REIT from S$1.70 to S$1.52

“Our dividend discount model (DDM)-based price target assumes 2.8 percent risk-free rate (from 2.1 percent) and 8 percent cost of equity,” Lim in a report published on 20 June 2022.

In particular, the analyst is concerned over Suntec REIT’s elevated gearing of 43.7 percent and low fixed rate hedge of 53 percent. Currently, there’s also limited scope for upside surprises.

Looking ahead, Lim has adjusted his distribution per unit (DPU) estimates by 4 percent, -0.3 percent and -6.8 percent for FY2022, FY2023 and FY2024 respectively. The estimates take into account the trust’s capital top-ups of S$46 million from FY2022 to FY2023 and a higher proportion of fees paid in cash (from 20 percent to 50 percent).

“The impact of higher utility charges would see management corporation strata title (MCST) contributions rise (by) S$7 million in 2023 but it can be partly offset by the return of atrium sales,” noted Lim.

“The drop in 2024 DPU is due to the depletion of top-ups. Suntec’s gearing is elevated at 43.7 percent with a low fixed rate hedge of 53 percent,” he reckoned, estimating that an increase of every 100 basis points in rates will reduce the REIT’s DPU by 9 percent.

As a whole, Lim deems Suntec REIT’s risk-reward profile as “unattractive”. Comparatively, he prefers CapitaLand Integrated Commercial Trust (CICT) for its diversified real estate portfolio.

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