Upside From Reopening And Redevelopment Projects
Suntec City Office has secured tenants relocating their regional HQs from Hong Kong
to Singapore. Suntec City Mall benefits from the return of office crowds in 1H22 and the
return of tourists in 2H22. We have factored in capital distribution of the divestment
gain from 9 Penang Road at S$20m each in 2022 and 2023. SUN provides 2022
distribution yield of 5.5% and trades at a discount of 15% to NAV per unit of S$2.11.
ESR Cayman was installed as the new sponsor. Maintain BUY. Target price: S$1.88.
WHAT’S NEW
• Consumer companies relocating regional HQs to Singapore. Suntec City Office has
received more concrete enquiries from multinational companies seeking to relocate their
regional headquarters from Hong Kong to Singapore. Samsonite has expanded its footprint
at Suntec City Office in 4Q21. New Balance has relocated to Singapore and became a new
tenant at Suntec City Office in 1Q22. We expect occupancy at Suntec City Office to edge
higher by 0.8ppt qoq to 98% in 1Q22.
• Potential tenants lined up for available space at MBFC Tower 1. Standard Chartered
Bank is expected to return 200,000sf of office space over nine floors at MBFC Tower 1 in
4Q22. We understand that a technology company has committed to take up 100,000sf of the
vacant space. Other potential tenants for backfilling include companies from media and
financial services industries. Management expects strong rental reversion for the vacated
space as Standard Chartered Bank, being an anchor tenant, pays lower rent.
• Office properties experiencing higher physical occupancy. Working from home is no
longer the default and 50% of employees were allowed back to their offices starting Jan 22.
Physical occupancy at Suntec City Office has improved by 10ppt to 25% in early-22.
Likewise, physical occupancies at Marina Bay Financial Centre and One Raffles Quay have
improved by 10ppt to 30%. With 75% of employees allowed back to their offices starting Apr
22, physical occupancies at SUN’s office properties should further improve.
• Suntec City Mall benefitting from reopening. Tenant sales for Suntec City Mall gathered
momentum in November and surpassed pre-pandemic levels in December last year. Footfall
is expected to further improve with group size for dining in increasing from five to 10 starting
Apr 22. With the reopening of borders through the new Vaccinated Travel Framework
implemented since Apr 22, we expect the return of tourists to lead to further recovery of
shopper traffic and tenant sales in 2H22. Suntec City Mall should not incur any rental waiver
in 2022 compared to S$6m in 2021. Management currently maintains guidance on negative
rental reversion at 10% in 2022.
• Deleveraging through portfolio reconstitution. The authorities have approved the planning
control amendments to enhance the retail podium and develop a new office tower at
Southgate Complex. SUN could consider:
a) Divesting Southgate Complex with the approved redevelopment plan.
b) Selling Southgate Complex to a joint venture company. SUN could partner Haiyi Holdings
for the redevelopment of Southgate Complex.
Other options for divestment include 177 Pacific Highway in Sydney (valuation: A$720m) and
55 Currie Street in Adelaide (valuation: A$152m).
• Sharing the spoils from redevelopment. SUN divested its 30.0% stake in 9 Penang Road
(previously known as Park Mall before redevelopment) to Haiyi Holdings at an agreed
property value of S$295.5m or S$2,468psf in Jun 21. The agreed property value was 5.7%
premium above the latest valuation of S$931.8m and 30.3% above total development cost of
S$756.0m. Management would consider distributing divestment gain from 9 Penang Road of
S$66.5m to unitholders, potentially over two years in 2022 and 2023. We have factored in
capital distribution of S$20m each in 2022 and 2023.
STOCK IMPACT
• ESR Cayman took over as new sponsor. ESR Cayman has completed the acquisition of
ARA Asset Management, including subsidiary LOGOS, for US$5.2b in Jan 22. Its AUM has
expanded more than three-fold to US$140b. The acquisition has propelled the enlarged
group to the largest real asset manager in the Asia Pacific region and third largest listed real
estate investment manager globally. Founders and senior management continue to be the
largest shareholder with a combined 23% stake in ESR Cayman. Warburg Pincus is the
largest institutional shareholder with a 13.2% stake.
• Riding on a larger platform. With ESR Cayman as the new sponsor, SUN would be able to
tap on a larger platform and network to support its future growth.
• Singapore a thriving hub for technology and financial services. According to CBRE,
office rents for Grade A core CBD increased 3.8% to S$10.80psf/month in 2021. Net
absorption has reversed from negative 0.07m sf in 1H21 to positive at 0.59m sf in 2H21.
Demand was driven by technology companies and non-bank financial institutions, such as
private wealth and asset managers despite companies adopting hybrid working
arrangements. The two sectors accounted for 52% of leasing volume. Occupancy for Grade
A core CBD inched higher by 1.2ppt to 93.3% in 2H21 due to the flight to quality.
• Grade A offices within core CBD benefitting from lack of supply. According to CBRE,
total supply of office space is estimated at 3.76m sf over the next three years (2022-24),
equivalent to 1.25m sf per year and 13.4% below the 10-year historical average new supply
of 1.45m sf. New supply is expected to pick up in 2023 assuming IOI Central Boulevard
Towers is completed on schedule in 4Q23. CBRE expects office rents for Grade A core CBD
to increase 6.9% to S$11.55psf/month.
• Office properties accounted for 82% of SUN’s NPI in 4Q22.
EARNINGS REVISION/RISK
• We raised our 2022 and 2023 DPU forecasts by 8% primarily due to capital distribution of
divestment gains from 9 Penang Road.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.88 is based on DDM (cost of equity: 6.0% (previous:
6.5%), terminal growth: 1.2%).
SHARE PRICE CATALYST
• Employees returning to work at Suntec City Office and resumption of events at Suntec
Convention to trigger recovery in shopper traffic and tenant sales at Suntec City Mall.
• Full-year contributions from Minster Building in London, UK in 2022.