Although the acquisition was at a premium to market price, it was at a discount to Suntec REIT’s end-December net asset value (NAV) of $2.03. One of Group CEO Michael Smith’s strategies is to divest HKL’s non-core assets, such as MCL Land at NAV, and execute a share buyback at a discount to NAV. Here, part of the monies from SCPREF was used to acquire units in Suntec REIT at a discount to NAV, albeit above the prevailing market trading price.
Since Suntec REIT’s manager is owned by Tang Organization, a privately held company owned by Gordon and Serene Tang, one aspect of the relationship may be the impending divestment of 9 Penang Road to Suntec REIT, and possibly SCPREF. One market observer suggests that Suntec REIT and SCPREF could jointly acquire 9 Penang Road.
Vijay Natarajan, vice-president, real estate and REITs, RHB Bank, suggests that “the move to acquire a stake in Suntec REIT is likely a tactical one which could result in Suntec REIT selling its one-third stakes in MBFC Towers 1 and 2 to HKL’s private funds at a premium and crystallise value. The proceeds could be used to acquire 9 Penang Road from its sponsor.”
Rachel Tan, an analyst at Macquarie Equity Research, says that the Suntec REIT transaction by HKL “shows HKL’s intention to grow the AUM of SCPREF with third-party capital. With Suntec REIT undertaking a strategic review and the potential to unlock more value, HKL may potentially be able to acquire stakes in the Singapore office portfolio. However, the cost is paying a premium for the stake.”
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Tang Organization has announced its intention to undertake a strategic review of Suntec REIT’s portfolio to strengthen portfolio performance and enhance capital efficiency. It also announced its intention to pursue strategic initiatives that may support higher distributions in the coming years.
Most analysts and market observers view the 10.8% stake as more beneficial to HKL than Suntec REIT. Citi remains negative on Suntec REIT and maintains a sell recommendation. Suntec REIT’s Australian and UK properties are difficult to sell, given the hawkish interest-rate outlook and the assets’ “mediocre quality”, Citi says. The REIT’s aggregate leverage is above 40% and the sale of either ORQ or MBFC Towers 1 and 2 would weaken the portfolio, Citi reckons. “Tang Organization’s track record as Sponsor is not proven, with its only-managed REIT — Acrophyte Hospitality Trust (ACRO-HT) underperforming S-REITs since it acquired 19% stake in ACRO-HT and its manager in July 2024,” Citi adds.
Jonathan Koh, an analyst at UOB Kay Hian, believes that Suntec REIT’s investors are likely to welcome HKL as a unitholder. The latter has a low net debt-to-equity ratio of just 0.12 times and a debt-to-total assets ratio of 0.15 times. “We recognise that Hongkong Land is likely to be patient and could build up its holding gradually over time. Nevertheless, the emergence of a potential acquirer with deep pockets could provide an uplift and positive momentum for Suntec REIT’s unit price,” Koh says. He has upgraded his recommendation on Suntec REIT to a buy, with a target price of $1.71, up from $1.47 previously.
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DBS Group Research says Suntec REIT offers an estimated distribution yield of 4.4% to HKL’s FY2026, “making the investment immediately earnings accretive”. Additionally, any value-unlocking initiatives arising from the strategic review could support unit price appreciation and generate potential capital gains for HKL, for which DBS has a price target of US$10.70 ($13.69).
Tan of Macquarie has initiated coverage on HKL with an outperform rating and a target of US$11. She reckons HKL is likely to continue scaling its fund management platform. Parts of HKL’s Hong Kong portfolio will be seed assets for a Hong Kong private fund. In the future, when Westbund Central has stabilised, a China private fund or C-REIT is possible.
Kathy Chan, an analyst at Morningstar, says HKL’s shares are fairly valued and agrees with the consensus that HKL hopes to see value unlocked from Tang Organization’s strategic review of Suntec REIT. “A further increase in the stake is not in our base-case view,” Chan says.
There you have it — a lot rests on the ability of the strategic review to help unlock valuation at Suntec REIT, which is likely to involve the divestment of its UK and Australian assets. On the other hand, a divestment of Suntec REIT’s one-third stake in MBFC Towers 1 and 2, and ORQ to SCPREF would be positive for HKL (higher assets under management and fees), leaving Suntec REIT with “mediocre” overseas assets. Or, HKL and Suntec REIT could jointly acquire 9 Penang Road at some point.
