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DBS keeps Suntec REIT at 'buy' on securing UBS as sole tenant for 9 Penang Road

Samantha Chiew

SINGAPORE (Apr 18): DBS Group Research continues to rate Suntec REIT a “buy” with a target price of $2.12.

This came on the back of the REIT (30%) along with its JV partners – SingHaiYi Group (35%) and Haiyi Holdings (35%) – securing UBS as a sole tenant for 9 Penang Road. Haiyi Holdings is a private vehicle of Gordon and Celine Tang who own a majority stake in SingHaiyi Group.

UBS has fully pre-leased the 381,000 sq ft of net lettable area (NLA), with fit out expected to commence after TOP in 4Q19. It expects to move in the premises in 2H20.

For the remaining 15,000 sqft of retail space at 9 Penang Road, discussions are ongoing with various specialty shops and food and beverage outlets. Suntec REIT expects to co-curate the retail tenant mix with UBS.

The building comprises eight floors of office space in two wings from levels three to 10, with the first floor designated for retail space. Carparks are located in the basement and on the second floor.

In a Friday report, lead analyst Mervin Song says, “We understand UBS has signed a long lease in a mid-term rental review. While the exact length of the lease has not been disclosed, large anchor tenants in Singapore typically sign leases for 10 years or more.”

Song expects the total development cost of 9 Penang Road to come up to about $800 million with the gross development value of the project assessed at $940 million.

“We believe this news is net positive for Suntec REIT as it removes some uncertainty over the ability of Suntec REIT to fill 9 Penang Road and crystallises an estimated development yield in the low 4% which is higher than the sub- and mid-3% yields for stabilised office assets in Singapore,” says Song.

With UBS’ move to 9 Penang Road, Suntec REIT will lose UBS as a tenant at Suntec City Tower 5 and at One Raffles Quay. But given the tight office market and one- to two-year lead time, Song believes that the REIT should be able to backfillt he spaces vacated by UBS.

Now with 9 Penang Road 100% pre-leased, this opens up the possibility for Suntec REIT to further deepen its exposure to Singapore by buying out its 70% JV partners.

As part of the initial JV agreement, Suntec REIT and SingHaiyi/Haiyi Group have the option to acquire a wing in the development from the JV but with only a single tenant for the whole development, it may be more difficult though not impossible to split the agreement with UBS into two leases.

“We believe while Suntec REIT is exploring acquisition opportunities in Australia, investors would be more supportive of buying assets in Singapore rather than Australia,” says Song.

As at 2.55pm, units in Suntec REIT are trading at $1.88 or 31.5 times FY19 book with a distribution yield of 5.3%.