UOB Kay Hian analyst Jonathan Koh has lifted his target price on Suntec REIT to $1.73, a slight upward adjustment from his previous target price of $1.72.
While keeping his “hold” recommendation, Koh is buoyant on Suntec REIT’s prospects amid the recovery of the central London office market.
Suntec REIT had “opportunistically” acquired Nova Properties and Minster Building in London during the Covid-19, the analyst notes.
In London, the take-up rate totalled 3.8 million sq ft in 2QFY2022, which was an increase of 123% y-o-y and 24% above the 10-year average.
The recovery was broad-based but was strongest and fastest at the West End.
The take-up rate at the West End during the past 12 months was 24% higher in the 10-year average, Koh says.
“It was a strong quarter for pre-letting, which accounted for 10 out of 11 leases of more than 50,000 sf in size. There is flight to quality as occupiers prefer new and high-quality office space,” Koh writes.
“The recovery was driven by the financial services sector, especially in the core markets of Mayfair and St James,” he adds. “According to Cushman & Wakefield, prime office rents have increased by an average of 7.2% over the past 12 months (City Core: +9.3%, West End: +8.8%, East London: unchanged).”
In his report, Koh also sees that the hybrid working trend did not reduce the demand for office spaces in London.
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“CBRE has analysed leasing data for Central London during the past 12 months. Occupiers moving to new office spaces on balance are increasing their space requirements,” he says.
“There are more tenants expanding than tenants contracting. CBRE surveyed 68 tenants who executed new leases. Of these, 39 tenants took up more office space compared to 29 who downsized. The study demonstrated that hybrid working did not reduce demand for office space,” he adds.
Furthermore, Suntec REIT’s London portfolio is set to benefit from the UK government’s plans to overhaul regulations to reclaim London’s title as the busiest financial centre in the world.
“[The government] intends to ease regulations for banks, insurers and fund managers to reinvigorate the financial services industry post Brexit”, Koh writes. “Regulations on a wide range of services from initial public offerings (IPOs) to green finance must be rewritten to replace existing European Union (EU) regulations,” he adds. “Potential new regulations include reducing the amount of cash reserves that insurers need to hold and providing flexibility for insurers to invest in infrastructure projects. Regulators will also be made accountable to a secondary objective of promoting economic growth.”
While Suntec REIT’s London properties are currently providing stable contributions, Koh has noted that the REIT’s Melbourne portfolio has seen higher vacancy rates caused by negative net absorption in the 2HFY2021. During the period, the REIT’s Melbourne portfolio saw “modest” actual tenant expansion in the 2HFY2021 due to the large corporations still assessing efficient usage of office space in response to hybrid working.
“Higher cost of construction has put upward pressure on rents for new developments, which allows landlords of existing office buildings to raise rents. Net face rent has increased 3.9% y-o-y and 0.4% q-o-q to A$684 ($650.45) per sqm per year,” says Koh.
He adds: “Incentives have eased 20 basis points (bps) q-o-q to 40.4%. Yield has compressed 10 bps y-o-y to 4.66%. Vacancy has deteriorated 2.6 percentage points y-o-y to 12.9% as new supply has outstripped net absorption.”
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In Melbourne, the analyst suggests that Suntec could consider divesting Southgate Complex with the approved redevelopment plan, or selling Southgate Complex to a joint venture (JV) company to redevelop Southgate Complex.
Further to his “hold” call, Koh has kept his existing distribution per unit (DPU) forecast for the REIT.
Catalysts to Suntec REIT’s unit price, in his view, include positive rent reversion at Suntec City Office in 2022, employees returning to work at Suntec City Office, the resumption of events at Suntec Convention, as well as full-year contributions from the REIT’s Minster Building in London for the FY2022.
Units in Suntec REIT closed flat at $1.59 on Sept 7.
