EUR 850.00 For Business Accounts Only

Morningstar | CCT's 1Q In Line, Driven by AST2 and Gallileo; CapitaSpring Underpins Midterm Growth; FVE Raised

We have increased our fair value estimate for CapitaLand Commercial Trust to SGD 1.76 per unit from SGD 1.70 as we factor in a higher rental income for AST2 and Gallileo. We also project 21 Collyer Quay (currently known as the HSBC building) to be able to maintain its current rental income of SGD 27.7 million after it is refurbished and re-leased following the end of the existing lease with HSBC in April 2020. Management hasn't ruled out the option of redeveloping or selling the property, although the current focus would be to refurbish and re-lease it. Our narrow economic moat and stable moat trend ratings are unchanged. We think the units are currently overvalued, with future growth mainly driven by Gallileo (acquired in the second quarter of 2018) and the development of CapitaSpring, which is due to be completed by the first half of 2021. The trust is ramping up marketing activities for CapitaSpring and will open an interactive marketing show suite in the second quarter of 2019.

CCT’s first-quarter results were in line with expectations. Net property income increased 3.4% year over year to SGD 79.8 million on the back of a 3.5% year-over-year increase on revenue to SGD 99.8 million. Distribution per unit increased 3.8% year over year to SGD 0.022. The higher net property income was driven by higher contributions from Asia Square Tower 2 and Gallileo. These were partly offset by lower contributions from CapitaGreen, which was affected by negative rental reversions on leases signed previously; Six Battery Road, which was affected by lower occupancy; and the divestment of Twenty Anson in the third quarter of 2018.

Occupancy rates remained largely stable at most of CCT's properties except for a slight increase at One George Street, which was offset by a slight decline at Six Battery Road, resulting in average occupancy rate for the portfolio declining to 99.1% in the first quarter from 99.4% at the end of 2018. It is worth noting that three out of the nine properties that CCT owns recorded 100% occupancy: Bugis Village, 21 Collyer Quay, and Gallileo. We expect occupancy rates to remain stable with limited upside as most of CCT's properties are at close to 100% occupancy rates. New leases in the first quarter were largely from the retail products and services, financial services, business consultancy, IT, media, and telecommunications sectors.

The average grade A office monthly rental rate in the first quarter continued to increase to SGD 11.15 per square foot after hitting a bottom of SGD 8.95 in the first half of 2017. This supports our view that office rental rates troughed in 2017 and will recover in the next few years. This is supported by improving demand and normalized supply for office space from 2018 to 2021 after a big increase in net supply in 2016 and 2017. It is expected that only around 0.8 million square feet on average will be added every year from 2018 to 2021, which is close to the long-term historical average of 0.8 million square feet of annual net supply additions. For the remainder of the leases that are expiring in 2019, the average rental rate of SGD 10.44 per square foot is below the current market rental rate; this will support near-term positive rental revision in 2019, in our view. In the medium term, we expect a large increase in rental revision in 2020 as the average rents for leases that expire then are significantly below the current market rents. However, we could see some downside risks in rental rates in 2022 as a huge supply of 1.8 million square feet is expected to be completed then.