CapitaLand Commercial Trust - Well-Positioned For a Rebound
- CapitaLand Commercial Trust (CCT) is our Top Pick in the office sector with a DDM-derived TP of SGD1.68 as we believe the growth catalysts are now in place with:
- Potential redevelopment of GSCP into prime Grade-A office space;
- Potential stake sale in One George Street allowing it to recycle capital;
- Yield accretion from AEI works at Raffles City shopping centre.
- Despite near-term headwinds facing Singapore’s office sector, we believe CCT is relatively well-positioned to cushion the impact, with its near-full portfolio occupancy and limited lease expiry profile.
Redeveloping GSCP to unlock shareholder value.
- CapitaLand Commercial Trust (CCT) has submitted plans to the authorities to redevelop Golden Shoe Car Park (GSCP) into a higher-value commercial development. GSCP could potentially add 1m sqf of commercial GFA in Singapore’s CBD once fully redeveloped. Works, set to commence in 2H17, are expected to be completed by 2021 – subject to obtaining all relevant approvals and the completion of a feasibility study. We estimate total development costs (including a differential premium) to be in the range of SGD1.5-2bn, based on a similar redevelopment of Market Street Car Park.
- We are positive on the value-unlocking move, considering the prime location and limited visibility of office space coming on- stream post 2020.
One George Street stake sale could eliminate funding concerns.
- Media reports have mentioned that China Life Insurance and Haitong Securities are currently doing due diligence to potentially acquire a 50% stake in One George Street. If it goes through, the sale could raise SGD550-600m in proceeds, which in turn could be effectively redeployed for the redevelopment of GSCP without the need for any equity issuance.
Raffles City AEIs to retain malls premium positioning.
- CCT is currently undertaking AEI works at Raffles City Shopping Centre (60% stake) which include refurbishing the main entrance, mall interiors, upgrading lift lobbies and revamping the central atrium. The AEI is expected to be completed by 1Q18 at an estimated cost of SGD 54m.
- We believe the AEI works would help CCT in maintaining the premium positioning of the mall, considering the increased competition among mall owners to attract and retain tenants.
High occupancy buffers the impact of a challenging office market.
- Despite a tough office market, CCTs portfolio occupancy rate edged up 0.2ppts QoQ in 3Q16 to 97.4%. With this, the REIT has about 1%, 6% and 13% of office leases (as a percentage of NLA) due for renewal in 2016, 2017 and 2018 respectively.
- With a pro-active management team and modest lease expiries, we believe CCT would be able to well navigate the challenging office market in 2017.
Maintain BUY, with a SG1.68 TP.
- Our TP reflects a COE of 7.8% and TG of 1.5%. We have not factored in any potential upside from the redevelopment of GSCP, which is pending approvals.
- Despite potential headwinds facing the office sector, we believe CCT is relatively well-positioned to cushion the near- term impact of the challenges.