CapitaLand Commercial Trust - OCBC Securities 2015-09-25: Office outlook deteriorates further

CAPITALAND COMMERCIAL TRUST CCT C61U.SI

CapitaLand Commercial Trust: Office outlook deteriorates further

 Significantly over-supply looms

 Grade A rentals to dip 10%-20% in FY16

 Lowering FV estimate to S$1.39

Due to mounting external uncertainties, the government recently downgraded its 2015 GDP growth forecast from 2.0%-4.0% to 2.0%-2.5% and private economists have similarly lowered their consensus from 2.7% to 2.2% in the latest quarterly MAS survey.
In the Grade A office space, our channel checks indicate that overall demand from financial institutions and commodities firms have softened and 2Q15 island-wide net absorption of 296k sqft came in significantly below the 5-year average of 459k sqft.
In particular, we are concerned about the 2.79m sqft glut of CBD supply over 2H15 to 2016 and the growing trend of companies relocating outside the CBD to regional centres and business parks, which has yielded up considerable secondary supply.

Given a weaker outlook, we lower our FY16 forecast for Grade A rentals and now expect a 0% to -5% dip in 2015 (unchanged) and a -10% to -20% correction in 2016 (versus -5% to -10% previously).
In 2Q15, Grade A rentals fell 0.9% QoQ to S$11.30 psf/mth after peaking at S$11.40 psf/mth in 1Q15. While capital values remain stable for now, we see a mix of falling rentals and rising rates likely putting downward pressure on valuations ahead.

As at end Jun 15, CapitaGreen was 80.4% committed. Despite weaker than anticipated conditions, we still see management achieving an occupancy rate above 90% by the end of this year given their strong execution ability, but operating in a challenging market likely points to below-forecast rentals over the current reversion cycle.
We understand that passing rentals are currently below the forecasted S$12-$14 range. The trust had continued to report higher valuations on their office portfolio in 2Q15, with discount rates dipping 25 bps and higher rental assumptions, but further gains appear increasingly unlikely ahead given market conditions.
Our fair value estimate dips to S$1.39 from S$1.54 previously due to lower rental assumptions in our valuation model. Maintain HOLD.

Eli Lee OCBC Securities | http://www.ocbcresearch.com/ 2015-09-25

OCBC Securities Analyst Report HOLD Maintain HOLD 1.39 Down 1.54