• Suntec REIT (SGX:T82U) remains our preferred pick in the office/retail REIT space for its attractive valuation of 0.7x P/BV, and earnings recovery from its recently completed and acquired assets.
• Suntec REIT’s office portfolio (66%), which accounts for the bulk of its income, is expected to remain resilient while retail mall earnings should rebound in 2021, given the absence of rental rebates.
• Top Pick with S$1.79 target price, 18% upside and ~6% yield.

We Expect Suntec REIT's Distribution to Rebound 25% Y-o-y in 2021

• The distribution rebound was driven by full-year contributions from Suntec REIT’s recently completed development assets (21 Harris Street, Olderfleet, and 9 Penang Road), absence of rental rebates, and uplift from positive rent reversions signed.
• We estimate Suntec REIT will resume its capital top-up with the stabilisation of COVID-19 and have assumed S$10m in capital top-ups for 2021.

Office Portfolio Remains Resilient

• Overall, Singapore office occupancy remains high at 98.1% year-to-date (at nine months), while ~348,500 sqf of leases were signed of which ~30% are new leases. Demand for new leases was mainly from the tech, media & telecommunication and financial services sectors.
• Rent reversions, though tapering off, remain at +9% year-to-date and +4.6% for 3Q.
• Around 33% of office leases are due for 2021, with average rent expiry of S$8.78 psf. As the expiring rents are still ~10% below market rates, we expect flattish to slight positive rent reversions in 2021.

Retail Performance Improving, Occupancy Pressure Expected

• Overall q-o-q retail occupancy dipped 3ppts to 93.4% on non-renewals and some pre-terminations. Most tenants were offered 4 months of rent rebates for 2020 (including Government grants) and ~10% of them (by NLA) were granted rent deferments. On the positive side, tenant sales rebounded to 70% of pre-COVID-19 levels from April’s ~35% lows.
• Looking ahead, we expect pressure on occupancy to persist and overall occupancy to remain at ~90% levels. Rents are also expected to remain under pressure and we expect 5-15% negative rent reversions for upcoming leases.
• For the convention wing (~6% of FY19 NPI), a recovery is only expected in 2022.

Nova Properties Acquisition Approved by Unitholders

• Nova Properties (50% stake) is the Suntec REIT's maiden acquisition in the UK and comprises of 2 Grade-A office buildings with ancillary retail. The property is 100% occupied with a long weighed average lease expiry (WALE) of 11.1 years (weighted average lease break: > 10 years) vs the existing portfolio WALE of 4 years, offering good income visibility amid COVID-19 uncertainty.
• Post-acquisition, the UK will account for 7% of Suntec REIT’s portfolio, with Australia and Singapore at 16% and 77%.
• In the medium term (three years), Suntec REIT's management expects more overseas acquisitions (30-40% of total assets) due to tighter market yields in Singapore.

Source: RHB Invest Research - 16 Dec 2020