Stellar Suntec REIT burdened by intensifying retail headwinds

Its share price has appreciated 26% YTD.

Suntec’s stellar performance is at risk from sluggish occupancy rates for Suntec City Mall’s Phase 3 development. According to OCBC, the mall currently has a relatively lacklustre committed occupancy rate of 60% as of the end of September.

The disappointing figure is underpinned by continued headwinds in Singapore’s retail sector. “. We see downside risks to our FY15 gross revenue and DPU forecasts if the situation remains sluggish,” noted the report.

Suntec REIT’s strong office portfolio will be its main driver of growth, but rental growth is expected to moderate starting 2015.
“The momentum for prime office space in Singapore remains robust, as illustrated by the 3.3% QoQ and 14.7% YoY increase in Grade A rentals in 3Q14, based on data from CBRE. We expect Suntec REIT to be a beneficiary of this trend, as approximately 69% and 68% of its NPI and NLA are contributed by the office segment, respectively. Notwithstanding this positive environment, we believe the pace of rental increase would moderate next year. Growth is expected to ease further in 2016, given the large pipeline of supply coming on stream (~3.9m sq ft),” noted OCBC.

Suntec REIT's share price has appreciated 26% year-to-date, but OCBC notes that the potential yield compression could be limited at this juncture.