• 9 Penang Road 100% pre-leased to UBS.
• Long-term lease crystallises an estimated yield on cost in the low 4%.
• Net positive despite UBS vacating space at One Raffles Quay and Suntec City office.
• Maintain BUY, Target Price of S$2.12.

What’s New

Secures UBS as sole tenant for 9 Penang Road

• Suntec REIT (SGX:T82U) and its JV partners announced that it has fully pre-leased 9 Penang Road to UBS, a global financial institution. This follows recent press reports that UBS was considering relocating to the property.
• Suntec REIT revealed that UBS will be taking up 381,000 sqft of NLA with fit out expected to commence after TOP in 4Q19. UBS is expected to move into its new premises in 2H20.
• The new UBS offices will house around 4,000 people with UBS’s operations at One Raffles Quay and Suntec City relocating to 9 Penang Road. We understand UBS currently occupies 230,000 sqft at ORQ and 90,000 sqft at Suntec Office or a total of 320,000 sqft.
• The new property will also house the UBS University which provides training and development programmes for its employees across the region.
• For the remaining 15,000 sqft of retail space at 9 Penang Road, discussions are ongoing with various specialty shops and food and beverage outlets. Suntec REIT expects to co-curate the retail tenant mix with UBS.
• We understand UBS has signed a long lease in a mid-term rental review. While the exact length of the lease has not been disclosed, large anchor tenants in Singapore typically sign leases for 10 years or more.

9 Penang Road Development Overview

• 9 Penang Road is a JV development between Suntec REIT (30%), SingHaiyi Group (SGX:5H0) (35%) and Haiyi Holdings (35%). Haiyi Holdings is a private vehicle of Gordon and Celine Tang who own a majority stake in SingHaiyi Group.
• Total development cost is expected to be S$800m with the gross development value of the project assessed at S$940m (100% basis).
• The 9 Penang Road building comprises eight floors of office space in two wings from levels 3-10, with the first floor designated for retail space, while the car parks are located in the basement and on the second floor.
• It is located near the prime Orchard Road shopping belt and is directly opposite Plaza Singapura, a large shopping mall. The property is also a short walk away from the Dhoby Ghaut MRT station which is a major interchange with access to the North-South, North-East and Circle lines.

Our Thoughts

• The news of UBS taking up the whole of 9 Penang Road is not surprising given prior guidance by Suntec REIT that it had received offers from prospective tenants wanting to take up the entire building and recent press reports. However, Suntec REIT was mulling then whether 9 Penang Road should be leased to a single tenant or multiple tenants and the risk/rewards under both options.
• We believe this news is net positive for Suntec REIT as it removes some uncertainty over the ability of Suntec REIT to fill 9 Penang Road and crystallises an estimated development yield in the low 4% which is higher than the sub-and mid-3% yields for stabilised office assets in Singapore.
• Suntec REIT will lose UBS as a tenant at Suntec City Tower 5 which it wholly owns and at ORQ which it owns a one-third stake with Keppel REIT (SGX:K71U) and Hongkong Land (SGX:H78). However, given the tight office market and 1-to-2-year lead time, Suntec REIT should be able to backfill the space vacated by UBS. The expected move into 9 Penang Road, accounting for the fit period which we understand is also close to the expiry of UBS's leases at ORQ and Suntec City in late 2020 and early 2021 respectively.
• Finally, with 9 Penang Road now 100% pre-leased we believe this opens up the possibility for Suntec REIT to further deepen its exposure to Singapore by buying out its 70% JV partner. As part of the initial JV agreement, Suntec REIT and SingHaiyi Group/Haiyi Group have the option to acquire a wing in the development from the JV but with only a single tenant for the whole development, it may be more difficult though not impossible to split the agreement with UBS into two leases.
• We believe while Suntec REIT is exploring acquisition opportunities in Australia, investors would be more supportive of buying assets in Singapore rather than Australia.
• Given this positive development and Suntec REIT’s exposure to the expected multi-year upturn in Singapore office rents, we maintain our BUY call and Target Price of S$2.12.

Source: DBS Research - 18 Apr 2019