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It offers decent yield plus solid exposure to an improving outlook for office and retail properties, says LESLIE YEE

LISTED in December 2004, Suntec Real Estate Investment Trust (Suntec Reit) has a wide investment mandate that allows it to invest in retail and office properties. At its listing, Suntec Reit’s portfolio comprised office and retail space in Suntec City, a prime integrated commercial complex in the central business district.

Since then, Suntec Reit has added two more properties, Park Mall and Chijmes, to its portfolio. Latest valuations of the trust’s properties as at April 1 put the portfolio at $2.75 billion, throwing up a revaluation surplus of $106 million.

Suntec Reit’s manager is ARA Trust Management (Suntec) Limited (ARA Suntec), which is part of ARA Asset Management Limited Group (ARA). ARA in turn belongs to Hong Kong tycoon Li Ka-shing’s Cheung Kong (Holdings).

The trust’s substantial shareholders are Capital Group with a 6.1 per cent stake and Cheng Yu Tung, Lee Shau Kee and Shaw Trustee, each of whom has a 5.8 per cent stake. The free float is 70 per cent

‘We have delivered five consecutive quarters of consistent growth in distribution since our listing,’ says ARA Suntec chief executive officer Yeo See Kiat. Annualised distribution per unit (DPU) for Suntec Reit of 7.34 cents for the latest quarter ended March 2006 is 22 per cent higher than that in a roughly comparable period a year ago.

Mr Yeo is pleased with Suntec Reit’s acquisitions of Chijmes and Park Mall and is now focusing on creating a more exciting experience for shopper and visitors at these properties. Looking ahead, Suntec Reit is keen on further acquisitions. ‘We have been and are pro active on the acquisition front,’ says Mr Yeo.

But Suntec Reit is not in any hurry to join an increasing number of Reits which are looking to acquire properties outside Singapore. Mr Yeo says, ‘As to cross border acquisitions, we are still focused on Singapore presently.’

Suntec Reit has a four-pronged acquisition strategy involving a focus on new growth corridors, the strengthening office sector, the robust retail market and asset enhancement opportunities.

The trust does not own the convention space at Suntec City, but Mr Yeo is excited by Suntec City being the venue for this year’s annual meetings of the International Monetary Fund and World Bank in September. The high-profile international event would further boost Suntec City’s prominence, he says.

Mr Yeo is positive about prospects for prime office space in Singapore in the coming years. As for potential competition from new big shopping malls that are coming up such as VivoCity, he says that they will ’strengthen Singapore as a regional shopping hub’.

Each mall will have to focus on its respective strength, he says. For Suntec City, the Reit is focusing on creating more concepts, excitement and vibrancy to make a visit to Suntec City a positive and enjoyable experience, he says. Suntec Reit has implemented asset enhancement initiatives such as a New Happy Kidz Zone, which saw the entry of Toy ‘R’ Us megastore.

For its latest quarter ended March, Suntec Reit’s DPU was 1.81 cents, almost 20 per cent ahead of forecast in the initial public offering prospectus. In the latest quarter, office occupancy at Suntec City continued to rise while retail revenue grew by close to 4 per cent quarter-on-quarter. Financing cost averaged 3.2 per cent, and 70 per cent of the net debt had been hedged as at end-March.

Of late, interest rate worries have proved a major bugbear for Reits. Coupled with that, investors in Reits are increasingly spoilt for choice as more alternatives hit the market, such as Frasers Centrepoint Trust.

Still, fears of interest rate rises may be overdone and Reits with quality assets and a track record of successfully acquiring assets and capable of growing organically, such as Suntec Reit, could be worth investing in.

Suntec Reit has hedged a significant portion of its debt. Moreover a rising interest rate environment could be linked with higher inflation as well as higher office and retail rents.

In terms of transport infrastructure, the completion of the Circle Line MRT will benefit Suntec City and Park Mall. A big theme playing out in Singapore is the rejuvenation of the urban centre, with mega projects like the Business and Financial Centre and the Integrated Resort at Marina Bay coming on stream.

There’s debate as to whether quality new projects will cannibalise demand for prime office and retail space.

New projects, though, need time to complete and in the meantime, properties like Suntec City can ride on the improving economic prospects in Singapore and the benign office and retail property cycles here. And when the new projects are completed, Singapore could become an even more important business and convention hub.

All this means that properties like Suntec City and Chijmes, if managed well, should enjoy the spinoffs as Singapore moves closer to the leading global cities of London and New York.

Suntec Reit offers investors the chance to tap into the Marina Bay area as it becomes an exciting place in which to live, work and play.

But there is potential dilution to DPU that kicks in 42 months after December 2004 stemming from the issue of deferred units to the vendor of Suntec City’s retail and office space. Assuming these deferred units were issued at the listing date, Suntec Reit’s DPU for its latest quarter would have been reduced by 14 per cent.

Using annualised DPU for the latest quarter, Suntec Reit is currently trading at a yield of 6.3 per cent. Overall, Suntec Reit offers investors coming in now a decent yield plus solid exposure to an improving outlook for office and retail properties.

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Source : Business Times - 22 Jun 2006