As Singaporeans return to the workplace following the recent relaxation of safe management measures, RHB Group Research analyst Vijay Natarajan believes Suntec REIT will see a boost in demand for its assets.
He maintained his ‘buy’ call for the counter with an unchanged target price of $1.79 in an April 15 research note, translating to 14% upside and 6% FY2021 ending December yield.
The government lifted the maximum percentage of staff allowed to return to the office from 50% to 75% beginning April 5, with split teams no longer mandatory.
Natarajan says this bodes well for Suntec REIT’s Grade-A office space, as more tenants are likely to firm up on their leasing commitments after postponing them due to the COVID-19.
Citing a report by CBRE, he highlights that the office net absorption rate turned positive in 1Q2021 after three negative quarters, with Grade-A property rentals remaining stable q-o-q.
SEE:Further relaxation of measures bodes well for office, retail and hospitality REITs: DBS
“Although a recent news report said that DBS is surrendering 75,000 square feet of space in MBFC Tower 3, we believe this has been largely priced in and will not have a direct impact on the REIT’s performance. For FY2021, we expect its portfolio office occupancy rate to stay high, at around 90% with low- to-mid-positive rental reversions,” he adds.
On the retail front, Natarajan notes that Suntec City Mall saw new store openings including the 40,000 square feet SuperPark Singapore which reopened under new management on April 9, as well as Singapore’s largest Lego-certified store and Japanese discount chain store Don Don Donki.
He believes this will drive more crowds to the mall, while the return of office workers will also boost weekday tenant sales.
Management expects the mall occupancy rate to improve to >95% by end-2021, from 90% in end-2020. Rental rates are, however, expected to remain under pressure, with negative reversions estimated between 8% and 12%.
Natarajan also highlights the REIT is looking to divest some mature assets to mitigate its high gearing, which stands at 44.3%
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“A potential near-term divestment target, in our view, is 9 Penang Road (30% stake) which is valued at $279 million. Separately, Suntec REIT [is] also looking at potential redevelopment options for Southgate Complex, and at repositioning some of its convention space to extract better value,” he says.
The analyst views the REIT’s valuation as “still attractive” at 0.8 times FY2021 P/B, versus the sector average of 1.2 times.
As at 11.28am, shares in Suntec REIT are up 1 cent or 0.64% higher at $1.58.
