Daiwa: Suntec’s Australia acquisition looks ‘compelling,’ even for Adelaide

Suntec City mall in SingaporeSuntec City mall in Singapore; photo taken pre-Covid

Suntec REIT’s acquisition of an Adelaide, Australia, office building looks “compelling,” even for a secondary city, Daiwa said in a note Tuesday.

The REIT announced Monday it entered a deal to acquire a 12-storey freehold office building in South Australia, from AEP Currie for A$148.3 million (S$141.37 million or US$104.25 million).

Daiwa said it was “hard to argue” with the property’s 8 percent initial yield, noting the office leases have annual rent escalations of 3.5 percent to 3.75 percent.

“We are well aware that the Adelaide office market is not as deep as those of Sydney or Melbourne, has a higher vacancy rate (perhaps structurally), and the city might remain a secondary city for some time, but we believe the 8 percent initial net property income yield for a property in the heart of the Adelaide CBD still looks attractive” Daiwa said in a note Tuesday.

The investment bank compared the yield with Suntec REIT’s prior initial yields of 6.9 percent for the 177 Pacific Highway acquisition in North Sydney, which was announced in 2013, and Daiwa’s estimate of a 5.2 percent yield for the Southgate Complex acquisition in Melbourne, announced in 2016.

The 477 Collins Street development, announced in 2017, has a yield of 4.8 percent, while the 21 Harris Street development in Pyrmont, Sydney, announced in July, has a yield of 5.5 percent, Daiwa said.

But Daiwa had a note of caution on the Adelaide property.

“We see limited downside risk from the acquisition in the short term, though with a weighted-average lease expiry of 4.4 years, there could be leasing risk in several years, especially if some of the existing tenants such as the Commonwealth Government, South Australian Government, Allianz and Data Action move elsewhere when their leases expire,” the investment bank said.

Daiwa also pointed to concerns about whether the Australian dollar might continue to depreciate against the Singapore dollar, although the spot rate around 0.95 could be “a good entry point from an investment perspective, in our view.”

The investment bank raised its target price to S$1.76 from S$1.70 after increasing its distribution per unit forecasts by 0.1 percent to 3.1 percent 2019-21E after incorporating the Adelaide acquisition.

But it kept an Underperform call on the unit.

The unit price was flat at S$1.95 at 3:30 P.M. SGT.

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