Tuesday 24 October 2023

Suntec REIT CEO Clarification: Sell Office Strata Units to Ensure Leverage Remains Below 45%

 Suntec CEO has come out to clarify the decision the REIT will take to ensure its leverage ratio remains below 45%. You can read it here (a short 5 min article)

My Views

It is a sound judgement by the CEO to consider asset divesting to lower leverage ratio. What's more it is to offload office strata units which I think is indeed one of the most worthwhile asset to offload. W

As of now, Suntec's strata office is valued at a 3.5% cap rate. This is in line with the valuations used for the Singapore Office Space. If I were the CEO, I would gladly offload many of my office assets at such a generous valuation offered by Singapore valuers. An expected discount rate of 3.5% is even lower than the risk free rate of many central banks including that of Singapore's MAS, heck even DBS earns 3% placing reverse repo with MAS for no risk, why would investors consider buying office strata units when the risk is so much higher. Even T bills are giving better rates than investing in a Singapore office space. There seems to be no repricing in Singapore of such risk assets by the institute of Singapore valuers (pherhaps they are sleeping on their job and are close to criminally negligent on their duties)

To add to that, there is a WFH movement where it is not as pronounced to USA and Europe, however, it is a fact that there are surplus office spaces which companies here are considering to vacate (not announced but I know of companies who want to downsize their Singapore leased office spaces).

Hence if there are stupid buyers willing to buy my properties at such a low cap rate, I would happily offload. Globallly, risk free rates are 4.0%-5.0% and therefore, for Singapore valuers to continue using such absurb valuation cap rate of 3.4%-3.75%; I will make hay while the sun shines.

In summary, it is a good decision by Suntec REIT's CEO to offload strata office units to reduce the leverage ratio. It is the most rational and easy to execute. With so many stupid investors worldwide still thinking Singapore's office space is a good investment; while office spaces in Australia, Europe, UK, USA, Hong Kong, Thailand, Malaysia are imploding; it's a good time to pass the ticking Singapore time bomb to stupid foreigners.

"A Grade" for Suntec CEO's thinking: Offloading the right assets at their upcycle.

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