Suntec – MS

Wait For Clearer Signals

Downgrade to Equal-weight, wait for clearer signals: Suntec Reit has out-performed the STI by 19% from 3 months ago and is now marginally below our price target. Given the recent strong share price performance and our view that fundamentals have not substantially improved to warrant a change in our DCF-driven valuation, we are downgrading Suntec Reit to an Equal-weight rating.

Rental decline appears to be stabilizing, but for Office rents – rent increase is still some time away: Office rental declines appear to be stabilizing, with office rents down 12% and down 13% in 2Q09 and 3Q09 respectively, having declined 55% since the peak in 3Q08. 3Q09 showed a marginal positive net absorption of 32k sq ft and anecdotal evidence suggests that leasing activity has picked up recently given the
stabilization of the global and Singapore economy. However, given the large upcoming supply of ~2.6m sq ft in the next 2 years, we think it is too early to hope for positive office rental growth and we expect rents to bottom in 2011. Retail rents paint a more upbeat tone, with median central rents down 7% from the peak and down 1% QoQ. A study of upcoming retail supply in our report “Look Through The Cycle”, dated October 22, 2009, suggests that upcoming supply is well spread out in Singapore and we expect positive retail rent growth of 4% in 2010 as demand picks up with the improving economy and opening of two new integrated resorts.

What’s next: In the near term, we believe that the market will be focused on Suntec Reit’s 2009 asset valuations. We only expect a relatively small 4% decline in asset values, and for gearing to reach 38% by the end of 2009. We believe the risk of Suntec Reit undertaking an equity raising to shore up its balance sheet post asset devaluation is low, but believe the perceived risk will continue to be an overhang on the share price until details of the asset valuations are known.