Broker: UOB Kay Hian
Date: 30 October 2024
Singapore REITs: Sector Resilience Amidst Market Fluctuations
The Singapore REITs sector has shown notable resilience, with select players reporting steady rental reversions and maintaining strong occupancy rates in 3Q24. This report provides an in-depth analysis of two significant REITs in the sector: CapitaLand Ascendas REIT (CLAR) and Suntec REIT (SUN). We explore each REIT’s strategies, financial performance, and growth outlook as they navigate a challenging economic environment.
CapitaLand Ascendas REIT (CLAR): Sustained Positive Rental Reversion and Strategic Redevelopments
CapitaLand Ascendas REIT (CLAR) maintained strong rental reversion performance and strategic asset management in 3Q24. The REIT’s consistent positive rental reversion across its portfolio and prudent capital management underscore its position as a stable investment in the REITs sector.
Financial Highlights
- Positive Rental Reversion: CLAR achieved a 14.4% positive rental reversion for leases renewed across multi-tenant buildings, with particularly high rates for logistics properties—31.7% in Singapore and 52.3% in Australia. This robust reversion trend reflects steady demand and well-executed leasing strategies.
- Occupancy: Portfolio occupancy slightly decreased by 1 percentage point to 92.1%, mainly due to non-renewals in Australia and the U.S. However, Singapore’s occupancy rate remained stable at 92.0%.
- Capital Management: With an aggregate leverage of 38.9% and 80% of borrowings at fixed or hedged rates, CLAR’s capital structure remains resilient. The all-in cost of debt remained stable at 3.7% in 3Q24.
Strategic Developments
- Asset Recycling and Redevelopment: CLAR has initiated multiple redevelopment projects targeting high-demand sectors like technology, life sciences, and logistics. Key projects include Geneo at 1 Science Park Drive and a ramp-up logistics facility at Toh Guan Road East, which are expected to attract high-quality tenants and drive long-term growth.
- Tenant Expansion at Changi Business Park: New tenants, including Julius Baer and Singapore Airlines, have leased space at One@Changi City, underscoring the property’s appeal and potential for increased occupancy.
Suntec REIT (SUN): Resilient Office Segment and Retail Recovery
Suntec REIT (SUN) experienced varied performance across its portfolio, with strong rental reversions in its office segment and a positive recovery in retail occupancy. However, the REIT faces challenges in its Australian portfolio, where elevated office vacancies present a headwind.
Financial Performance
- 3Q24 Results: Suntec REIT reported a decline in gross revenue (-4.6% YoY) and net property income (-5.7% YoY), attributed to reduced contributions from Suntec Convention and key properties in Adelaide and London. Nonetheless, JV income rose by 5% YoY, primarily from Marina Bay Financial Centre (MBFC) and One Raffles Quay (ORQ).
- Distribution Per Unit (DPU): Suntec’s DPU fell to 1.58 S cents, marking an 11.9% YoY decline. This decrease aligns with a broader reduction in capital distributions compared to 3Q23.
Key Market Segments
- Singapore Office: The office segment saw robust rental reversions at 12.9%, with Suntec City Office fully occupied. Passing rents for this segment rose 3.2% YoY, reaching S$10.15 per square foot per month.
- Singapore Retail: Positive retail rental reversion of 21.2% was recorded at Suntec City Mall in 3Q24. Occupancy increased to 98.4%, thanks to new tenants filling spaces vacated by Pure Fitness and Pure Yoga. SUN’s management projects 15-20% rental reversion for the retail segment in 2025.
- Australian Portfolio: Suntec’s Australian properties face challenges due to elevated office vacancies, particularly in Melbourne and Adelaide. Although occupancy at 55 Currie Street improved to 61.4%, high vacancy rates in these cities may lead to valuation declines due to anticipated cap rate expansions.
Outlook for Singapore REITs
Singapore’s REITs sector remains well-positioned despite external pressures, with industry leaders like CLAR and SUN demonstrating resilience through strategic tenant retention, redevelopments, and prudent capital management. While economic uncertainties persist, the demand for premium office and retail spaces in Singapore is expected to sustain rental growth and asset stability, making Singapore REITs an attractive option for long-term investors.
