New office asset value reality is already priced in. The Business Times reported on Friday that the entire 32nd floor of Suntec City Tower 1 has been sold for about S$1300 per square foot of strata area. This is about 40% lower than previous strata floor transactions completed about seven months ago (above the S$2000 psf level). We believe this new deal is important as it gives an indication of the current market value for office space. However, Suntec REIT's current market value already reflects an implied asset value of S$885 psf for Suntec City Office (our estimate) - or a 32% discount to this latest transaction. Our valuation prices Suntec City Office at about S$1106 psf.

Potential risk of cash call. In our opinion, the refinancing of the S$825m in debt due this year is less of a problem than the potential need for an equity issue. In 4Q CY08, Suntec REIT saw property values fall 7% against its 3Q CY08 revaluation. We believe cap rates used by independent valuers still do not fully reflect downward trends in S-REIT capital values. For example, we understand that Suntec City Office was valued at S$1900 psf, or 46% higher than this latest transaction. This scepticism towards the accuracy of these valuations is creating downward pressure on share prices - Suntec's current share price of S$0.505 is at a 75% discount to reported NAV. As capital values fall, we estimate that Suntec could eventually need up to S$480m in fresh equity to maintain gearing at 40% levels. In the current environment, rights issues may need to be underwritten in order to succeed. As a non-sponsored REIT, any rights issue by Suntec could require the backing of investment banks or sub-underwriting arrangements with substantial shareholders.

Focus on cash flows. There are inherent strengths in Suntec's portfolio and we continue to believe in the merit of our BUY call on Suntec. The biggest concern today is how deeply earnings - and consequently distributions - will be affected by deteriorating economic conditions. We have adjusted our earnings and valuation assumptions, with a fairly conservative assessment of rents and occupancy levels. Our new DPU estimates for FY09-10 are 6-10% below consensus. This still translates to reasonable distribution yields of 18.6% and 16.1% in FY09F and FY10F respectively. Our SOTP value for Suntec falls 10% to S$0.95. Maintaining the 15% discount to SOTP, our fair value estimate falls from S$0.90 to S$0.80.