Brokers' Take: CGS-CIMB, Jefferies, OCBC optimistic about Suntec Reit's office portfolio

IN reports released on Thursday and Friday, brokerages were optimistic about Suntec Reit’s T82U r : T82U 0%esilient office portfolio, although they were less positive on its retail portfolio as Singapore re-imposes Phase 2 (Heightened) Alert measures.

OCBC, CGS-CIMB and Jefferies maintained "buy" on Suntec Reit, although Jefferies lowered its target price slightly to S$1.70 from S$1.75 previously. CGS-CIMB and OCBC Investment Research left target prices unchanged at S$1.79 and S$1.58 respectively.

Regarding the Reit's office portfolio, CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei expect the Reit's office contributions to improve, as around 80 per cent of its Australian dollar income is hedged as at H1 FY2021, and contributions from the newly-acquired Minster Building will be felt in the next half of the financial year.

OCBC noted that Suntec Reit's office segment remained resilient, with occupancy for its Singapore, Australia and UK portfolios at 95.0 per cent, 93.9 per cent and 100 per cent respectively.

Jefferies analyst Krishna Guha is also optimistic that demand from tech, asset managers, flex spaces and regional headquarters will help to backfill the space that Standard Chartered bank is leaving behind, as it gives up close to 200,000 square feet of space next year at the Marina Bay Financial Centre Tower 1.

Still, OCBC cited the Reit manager's acknowledgement that there could be some quarters of negative rental reversions next year, amid higher expiring rents in 2022 than in 2021. Mr Guha also said that the office occupancy trend needs a closer look.

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As for the Reit's retail portfolio, the picture is less rosy. OCBC noted that the Reit has extended its short-term rent restructuring with around 40 per cent of its tenants until the third quarter of this year.

As a means of risk sharing to help tenants tide over this difficult period, the rent restructuring would reduce the base rent by around 25 per cent, but increase the percentage of turnover sales. As a result, the Reit's manager expects rental reversions at Suntec City Mall to be at between negative 15 to 20 per cent for the full financial year.

Mr Guha noted that the re-imposition of Covid-19 restrictions could further delay the Reit's retail recovery; while the Reit is diversifying and striking a "right balance" between rent and occupancy, he found the Reit's Q2 results to be "mixed".

CGS-CIMB's analysts cited higher-than-estimated rental waivers to tenants as potential downside risk for the Reit, although a faster-than-expected recovery of Suntec Reit's retail and convention business from Covid-19 disruption could be a potential upside for the Reit.

Units of Suntec Reit traded flat at S$1.49 as at 4.08pm.