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Breakdown: Mixed Basket Of Thoughts For Suntec REIT
Breakdown, Tradeable | 16 April 2013
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By: Louis Kent Lee
Articles (199) Profile

Office rentals. If you think office rentals are poised to always see upside momentum in the ever bustling city of Singapore, you might want to think about that again. The lower Gross Domestic Product (GDP) figures (both current and expected), coupled with the government’s recent round of tighter labour policies and finally the pipeline of new offices supplied by upcoming business parks, which could possibly offer cheaper rental rates, will all be factors that are likely to have an impact or direct pressure on the yield of future office rentals.

In a report released recently by Credit Suisse, it noted that “the government’s tighter labour policies will have an impact on business expansion plans, coupled with expectations of lower GDP growth as well as the supply outlook, we believe that office demand may remain relatively slow, which means rents are unlikely to rise meaningfully from current levels,”

Due to the above mentioned factors, it seems that moving forward, renewed office leases may not reflect increasing rental yield. Among the REITs with high exposure in terms of office space wise, we have identified Suntec REIT (SR) as our main focus for this breakdown piece and see the thoughts surrounding SR.

Credit Suisse expressed that it was slightly less optimistic on rental rates for older Grade A and Grade B offices, in which SR has a large exposure of. it thus gave SR a rating of “Underperform” and a target price of $1.56. It added that the upcoming South Beach office tower across from Suntec City, which is set to complete in 2015, is poised to offer direct competition risk.

The potential risk of tenant departure three years down the road upon lease renewals or as a result of newer office schemes further fuelled Credit Suisse’s sentiment.

However, Maybank Kim Eng (Maybank KE) thinks otherwise. It noted that the offices at Suntec City mall (SCM) boasts full occupancy with less than 23 percent of office leases due to expire each year for the next three years.

Although occupancy rate during its Asset Enhancement Initiative (AEI) Phase 1 works fell to 74-76 percent, occupancy rates for its properties at One Raffles Quay currently stands at full occupancy, while occupancy rates for Marina Bay Financial Centre 1 increased to 99.9 percent from 99.5 percent. New tenants after NUS vacated its space in Park Mall have also been found.

Maybank KE is also of the view that average passing rents for SCM, post AEI, may be secured at $13.50 per square foot per month, as compared to that of SR’s target of $12.59 per square foot per month. It issued a target price of $1.90 with an unchanged “BUY” call for SR.

Despite being positive in the long term for SR, especially with the progress of its AEI and pre-commitment rate to its new Net Leasable Area, OSK DMG feels that SR will only be able to reap the benefits from the AEI in 2014.

OSK DMG sees a possible loss of income due to SR’s divestment in CHIJMES in June 2012, and the closing down of areas affected by the AEI at Suntec City. This loss of income is oikely to translate into a drop in SR’s Distribution Per Unit in 1Q13. That said, it believes that SR will most likely use its cash reserves to top up this drop in 1Q13’s DPU.

OSK DMG did not change their $1.80 target price for SR, but has downgraded its call on SR to “Neutral”.

As of its last close, SR traded at $1.965, outstripping the target prices seen above. With the reporting season coming close, what do you think about the above mentioned basket of thoughts?

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Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

Suntec REIT  1.780 -0.030 -1.66%   
Business: Real Estate Invs Trust. Ppties incl Suntec Office Towers, Suntec City Mall & Park Mall. [FY18 Turnover] Office (46.8%), Retail (34%), Others (Ad space, car park income , convention & exhibits) (19.2%).

Insight: Jan-19, FY18 gross revenue rose 2.6% to $363.5m du... Read More


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