Suntec Real Estate Investment Trust Has the Potential to Increase Its Distributions in the Future
With assets valued at more than S$9 billion, Suntec Real Estate Investment Trust (SGX: T82U) is the fourth largest REIT in Singapore. It owns a portfolio of well-recognised buildings in Singapore’s business district such as Suntec City office and 33% ownership in One Raffles Quay and Marina Bay Financial Towers One and Two. It also owns retail and office real estate in Australia.
But even with a seemingly stellar line-up of properties, Suntec REIT has been unable to deliver distribution growth in recent years. Singapore’s central office rental market is highly competitive with new office buildings emerging and some clients opting to shift out of the central business district (CBD) for cheaper options around the city fringe and business parks outside of the CBD. With Singapore’s office market accounting for 54% of the REIT’s net property income, the challenging central office rental environment has led to Suntec REIT’s stagnant distribution per unit since 2015, as shown by the chart below.
Source: Suntec REIT 2018Q3 Earnings Presentation
That said, a turnaround might not be too far away. The Urban Redevelopment Authority’s office rental index for the central region posted a 2.5% gain in the third quarter of the year, which followed a 1.6% growth in the second quarter. The index also marked the sixth consecutive quarter of rental growth.
With that in mind, could Suntec REIT manage to increase its distributions over the next few years? Here are three reasons to believe so.
Suntec REIT can capitalise on improving central office rental market
As mentioned above, the improving central office market could be a big factor in the REIT’s ability to increase distributions to unitholders. The REIT can capitalise on the office market up-cycle at One Raffles Quay where its occupancy is still below 96.1%.
Rents at Suntec City office, which contributes the bulk of the REIT’s office revenue, has also been increasing steadily. Committed rents achieved stood at S$9.05 per square foot in the third quarter, compared to S$8.95 and S$8.35 in the second and first quarter respectively.
Contribution from new developments
There are currently two projects under development — 9 Penang Road in Singapore and Olderfleet, 477 Collins Street in Australia. The two projects are scheduled to be completed by end 2019 and 2020 respectively, and could boost rental income when they are completed.
In its latest update, the management said that pre-committed occupancy for Olderfleet is up to 65.8% of the net lettable area.
The REIT also acquired an additional 25% stake in Southgate Complex in Australia, on top of the 25% it already owned this year. Full-year contribution from the new acquisition will likely add to the REIT’s bottom line next year.
Improving performance Suntec City Mall
Suntec City Mall contributes around 26% of the REIT’s rental income. In the most recent quarter, the mall recorded a 6.2% increase in gross revenue and a 9.1% increase in net property income (excluding the impact of the payment of a sinking fund of S$2.1 million).
The improved financial performance was backed by improving foot traffic, up 5.5% compared to last year and higher tenant sales, which was 5.4% higher.
The REIT has recognised the need to bring in high-quality tenants and recently introduced SuperPark, an all-in-one indoor activity park from Finland, which will strengthen the REIT’s position as a family-friendly mall.
According to analyst reports, the mall also managed to secure double-digit rental reversions this year, which will support higher rental income in the future.
The Foolish bottom line
While Suntec REIT has not been able to deliver distribution growth to unitholders in recent years, the future may sing to a different tune. The recovery in Suntec City Mall and improving central office rents could provide a welcome boost for rental growth in its existing portfolio. In addition, the contribution from new developments will provide additional rental contribution when completed. Investors who are willing to hold on till then will likely be rewarded for their patience.
This content was originally published here.