By Meenal Kumar
Mon, 14 Jun 2010, 09:37:26 SGT

The new Circle Line MRT stations could boost pedestrian traffic to Suntec REIT’s retail malls. Retail trends are also positive with MasterCard cardholders spending a total of US$44.3m over the first weekend of the Great Singapore Sale (GSS), up 18% YoY. Consumer confidence is also up. We expect the S-REIT sector to employ asset enhancement initiatives as a key strategy to grow portfolio income this year. Suntec’s AEI plans for Park Mall have been on the backburner due to the financial crisis and this might be an opportune year to re-launch the initiative. These positive retail developments are, of course, offset by the challenges faced by Suntec’s office portfolio. Still, valuations are attractive from a price-to-book perspective. Maintain BUY and S$1.44 fair value (17.7% estimated total return).

New MRT stations a traffic opportunity. Esplanade and Promenade, the two Circle Line stations connected to Suntec REIT’s Suntec City, opened on Apr 17. The new Bras Basah station is also in the vicinity of Chijmes. The eleven new stations that opened two months ago are projected to increase ridership on the Circle Line to 200k commuters per day from 40k per day previously (Land Transport Authority). The retail malls’ increased connectivity could boost pedestrian traffic, in our view.

Great Singapore Sale going great guns. According to the Business Times, both Singapore-based and visiting MasterCard cardholders spent a total of US$44.3m over the first weekend of the Great Singapore Sale (GSS), up 18% YoY. The purchases were primarily made at eating places and department stores. Meanwhile, a survey released by the MasterCard Worldwide Index of Consumer Confidence last month shows that consumer confidence in Singapore more than doubled to 86.6 points compared to a year ago. Confidence, according to the poll, is back to levels recorded in 1H08.

Time to re-launch Park Mall AEI? We expect the S-REIT sector to employ asset enhancement initiatives as a key strategy to grow portfolio income this year. Suntec has long had asset enhancement plans to overhaul Park Mall (PM). The REIT had first acquired 13,572 square feet of land along Penang Road in Jul 2007, and subsequently purchased another strip of land of roughly 1,105 sf in Mar 2008, for a total acquisition cost of S$15.6m. The land was intended for amalgamation with PM to create additional floor area – Suntec had said in 2008 that the total permissible gross floor area for PM would increase by roughly 67,810 sf to 451,727 sf. These plans were put on the backburner during the financial crisis. This could be an opportune year to re-launch this initiative.

Valuation. These positive retail trends, coupled with the opening of the new MRT stations, bode well for pedestrian traffic and consumer spending at the REIT’s retail portfolio. Asset enhancements are another growth driver. This is, of course, offset by the challenges faced by Suntec’s office portfolio, with prime office rents down 58.4% from peak 2008 levels according to CB Richard Ellis. Still, there has been a 5.8% decline in Suntec’s unit price since our last report in April and valuations are attractive from a price-to-book perspective. Maintain BUY and S$1.44 fair value (17.7% estimated total return).