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Why I Am Optimitic About Suntec Real Estate Investment Trust

Suntec Real Estate Investment Trust (SGX: T82U) is the fourth largest REIT in Singapore. It was listed in 2004 and owns a portfolio of properties located in Singapore and Australia. Some of the real estates it has include Suntec City, One Raffles Quay and three properties in the Marina Bay Financial Center.

Despite its seemingly prominent line up of properties located in prime areas of Singapore, the REIT has failed to deliver meaningful growth to unitholders. In fact, distribution per unit has declined from its peak of 11.7 cents per unit in 2009 to just 10.01 cents in 2017. This is also perhaps the reason for the modest growth in its unit price over the last 10 years.

However, the future may not always mirror the past. In spite of its poor past track record, I believe that Suntec REIT has the right things in place to improve its fortunes.

Latest acquisition is yield-accretive

Last year, Suntec REIT announced its acquisition of a 50% stake in Olderfleet located at Melbourne, Australia. A 40-storey office building is currently being developed on the site and is set to be completed in 2020. On a pro forma basis, the new property adds about 1.8% to distribution per unit (DPU).

With built-in rental escalation and a 5-year rental guarantee from its joint partner, the new building will continue to add DPU growth going forward.

9 Penang Road scheduled for completion in 2019

The REIT has a 30% stake in the new development on 9 Penang Road. The new property will be a 10-storey building with around 352,000 square feet of office space and 15,000 square feet of retail space.

The new building, when completed, will also be able to add to distributable income growth.

Positive trends for its anchor asset, Suntec City

Suntec City Mall has faced challenges recently as both the gross revenue and net property income earned from the property declined in 2017. However, some positive trends of late suggest that the mall might be able to turn things around.

For one, visitor footfall for 2017 increased by 12.8% to 45 million. Secondly, tenant sales also increased by 4.78% from a year ago. These two trends suggest that the mall is gaining greater traction from shoppers even amidst the challenging retail scene.

The improved footfall and tenant sales will give the REIT better pricing power with its tenants going forward. With the mall contributing 35% of the total net property income of the REIT (excluding joint ventures), an uptick in the mall’s performance will have a significant impact on the overall profitability of the REIT.

The Foolish bottom line

Suntec REIT has faced many challenges of late. With the dynamic retail scene in Singapore and the high supply of office spaces, the REIT has found it difficult to grow unitholder value over the years. However, with the recent acquisition of Olderfleet, development at 9 Penang Road and recent positive trends in Suntec City Mall, there might very well be some light at the end of the tunnel.

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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.