RHB Group Research analyst Vijay Natarajan has maintained his “buy” call on Suntec REIT with a lower target price of $1.72, down from his previous figure of $1.76. 

In a Sept 30 note, Natarajan noted that the return of tightening measures in Singapore is negative for Suntec City mall, and will likely decelerate its office space-leasing momentum in the short term. 

However, he remains positive on the long-term fundamentals of its high-quality office portfolio, and sees that this stock remains deeply undervalued. 

See: Suntec REIT most undervalued commercial S-REIT, says DBS

Suntec is trading at around a 30% discount to its book value, and some key catalysts are asset divestments at a premium to book values and yield-accretive acquisitions.

Elaborating on Suntec’s office segment, he is still positive on its long term outlook, despite its Singapore office portfolio occupancy rate in 2QFY2021 dipping 1.1% q-o-q to 95%, mainly due to UBS moving out. 

“However, we remain positive in our long-term outlook and expect the REIT to benefit from the ongoing flight to quality,” Natarajan writes.

He also thinks that the underlying strength in the office market is evident, pointing at Grade-A core central business district rental rates in 2QFY2021 rising 1% q-o-q to $10.50 per sq ft per month. This is the first growth since 4QFY2019. He adds that 1HFY2021 portfolio rent reversion was positive, and should remain so for the rest of the year.

Similarly, Natarajan notes that office capital values have held up well, as seen by the REIT’s robust transaction activity. Suntec had divested two office assets, a 30% stake in 9 Penang Road and Suntec City strata office units, at 6% and 9% premiums to their latest valuations.

As for its retail segment, the outlook for this segment remains challenging, with more rental rebates likely to be offered in 2HFY2021. He estimates potential rebates for  FY2021 to be at 3-5% of rental income ($1.5-3million), in addition to short-term rental rate restructuring. 

Rental rates, however, may stay under pressure, with reversions likely to be at -10% to -20%. As a comparison, rental reversions were -15.3% for 1HFY2021

On the other hand, Suntec City mall’s occupancy rate improved to 93.9% in 2QFY2021, and management expects this to reach 95% by the year-end. 

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Natarajan pointed out that asset recycling is likely to continue with potential divestments likely in its Australia portfolio (possibly 177 Pacific Highway), following the recent asset divestments in Singapore. The REIT is also exploring potential redevelopment opportunities for Southgate Complex, and repositioning some of its convention centre space to extract better value.

As of 3.01 pm, Suntec REIT was trading at $1.42, with a FY2021 price to book ratio of 0.7 and dividend yield of 6%