CITI Research has downgraded Suntec Real Estate Investment Trust : T82U 0% (Suntec Reit) to “sell” from “neutral”, and slashed its target price to S$1.13 from S$1.41 in anticipation of a potential downcycle in the office property market.

In a report on Wednesday (May 31), analyst Brandon Lee said the revised target price represents 0.53 times the price-to-book ratio, which is in line with his bottom-end estimates of 0.5 times to 0.9 times for past office downcycles. 

This comes after the research house lowered its distribution per unit estimates for the Reit by 4 per cent for FY2023, 7 per cent for FY2024 and 2.4 per cent for FY2025 to account for higher debt costs, lower office rents and weaker contribution from the Reit’s Singapore assets.  

For H2 2023, Citi has projected a rental downcycle and said it expects an industry downturn to impact Suntec Reit negatively, given that it derives 44 per cent of net property income from this sector. 

Factors cited by Lee include falling office rentals, a large supply of Grade A office stock and rising “shadow space” – or space that is underutilised though it remains leased out. 

He also foresees subdued demand due to weak economic growth, and said ongoing downsizing in the technology and finance sectors could affect the Reit’s performance as its portfolio is largely focused on office and retail assets. 

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Lee further noted recent office transactions of the Reit’s portfolio in Australia were concluded with falling selling prices as a result of higher interest rates. This jump in interest rates was also observed for the UK’s portfolio, which raised the capitalisation rates for the property trust further.

Despite this, Lee is optimistic that Singapore’s portfolio would perform better as the country’s cap rate movement is more muted. 

Based on his observations of Suntec Reit’s latest transactions, he estimates a cap rate of 3 per cent against Suntec Reit’s overall rate of 3.4 per cent.

He nonetheless remains cautious of Suntec Reit’s gearing ratio which currently stands at 42 per cent; the highest among its peers under Citi’s coverage.  

Selling its “two best assets” in Australia – 477 Collins Street and 177 Pacific Highway – would be the “best way” for the Reit to raise capital to improve its gearing, in Lee’s view. 

The analyst, however, cautioned that additional equity would be required if the Reit does not sell any assets before its December 2023 revaluation exercise, which would in turn threaten to offset the trust’s ongoing recovery in its Singapore’s retail and convention businesses. 

As at 2.28 pm on Thursday, units of Suntec Reit were trading down 1.5 per cent or S$0.02 to S$1.29.