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What You Need To Know About Suntec Real Estate Investment Trust’s Latest Acquisition

Suntec Real Estate Investment Trust (SGX: T82U) is the fourth largest REIT in Singapore’s stock market. It was listed way back in 2004 and owns properties in Singapore and Australia. Some of the prominent buildings in Singapore that it has a stake in are Suntec City, One Raffles Quay and three properties in Marina Bay Financial Center. In Australia, Suntec REIT owns commercial properties.

In the second half of 2017, the REIT announced that it had acquired a 50% interest in Olderfleet, 477 Collins Street in Melbourne, Australia for A$414.17 million. The property is currently being developed into a 40-storey prime office building that will have a 4.8% initial yield, and a completion date of mid-2020. Here are more important details about the acquisition.

Fully funded by debt

The acquisition was fully funded by debt. This is good for unitholders of Suntec REIT as it means that the additional income earned from the new property will add to the REIT’s distributions per unit. As mentioned earlier, the redeveloped-property will have an initial yield of 4.8%, upon the targeted completion of the project in mid-2020.

Suntec REIT’s Manager also estimated that on a pro forma basis, the acquisition will increase the REIT’s DPU by about 1.8%.

Freehold site

Like the other two Australian assets in Suntec REIT’s portfolio, Olderfleet, 477 Collins Street also sits on freehold land, which is highly advantageous for the REIT. Because the land is freehold, the REIT need not worry about renewing any land leases, and the property sitting on top of the land is also more likely to appreciate in value over time.

5-year rental guarantee

Another positive aspect about the deal is that Suntec REIT’s joint venture partner, Mirvac, has agreed to provide a five-year rental guarantee on any unlet space. With the agreement in place, Suntec REIT has assurance that the property will continue to generate stable income over the five-year period in question.

The fact that Mirvac is willing to come to this agreement is also testament to the faith that the two parties have that the property will eventually have a high occupancy rate. This also bodes well for the longer-term for Suntec REIT and its unitholders.

Built-in rental escalations

There will be built-in rental escalations of 3.5% to 3.75% on the tenant contracts for the property. This provides Suntec REIT with visible organic growth in rent.

The property also already had a 39.1% pre-committed occupancy rate when the deal was announced.

The Foolish takeaway

The latest acquisition certainly has many positives for Suntec REIT REIT and its unitholders. Not only does it further diversify the REIT’s current portfolio, it will also most likely be yield-accretive to unitholders. The five-year rental guarantee from Mirvac also provides the REIT with further assurances in terms of the rental income it can collect from the property.

Suntec REIT’s distributions per unit has somewhat stagnated over the last few years. But with the latest acquisition, unitholders can perhaps look forward to a brighter future ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.