Suntec REIT

Suntec REIT: HSBC upgraded Suntec to Buy on valuation grounds, with TP unchanged at $1.85.

On an industry-wide basis, for the office sector, house expects a combination of structurally lower demand and increased supply to put moderate pressure on rents resulting in a decline of 10% over the next two years, noting that some of the planned supply in the pipeline can be deferred.

Suntec City office (32% of gross valuation) has been more resilient than the market during past economic downturns and HSBC expects the same this time around as well.

For the retail sector, while challenges around operating costs persist, there is no further deterioration and thus HSBC expects flattish NOI (rent growth largely offset by higher costs) and flattish capital values.

Since early-2015, Suntec REIT declined 22% and underperformed the broad market (FSSTI: -13%) and the Singapore REIT index (FSTREI: –10%).

At the current price, the implied FY16e normalized NPI yield and implied pricing for SUN’s Singapore office assets is 4.8%.