CapitaLand Commercial Trust - DBS Research 2017-01-04: Moving from green to gold

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Moving from green to gold

Despite the expected decline in the office market, we believe the timely acquisition of the remaining 60% in CapitaGreen not only helps to offset potential negative rental reversions and lower occupancies for the rest of CapitaLand Commercial Trust (CCT)’s portfolio but will allow CCT to deliver a 2-year DPU CAGR of 4% (2015-2017 excluding impact from redevelopment of Golden Shoe), which is among the highest in the office sector (average of 2%) and above the S-REIT DPU CAGR of 1%.

Investors have been concerned over the value of CCT’s portfolio given falling office rents. We believe this is unwarranted given the resiliency of office property values in Singapore.
CCT’s Singapore Grade A office portfolio trades at an implied value of c.S$1,900 per square foot (psf) compared to recent sales of between c.S$2,700 (adjusted for 99-year leasehold for CapitaGreen) and $3,500 psf.
While CCT’s Grade A portfolio is unlikely to trade up to c.S$2,700 given the older profile of some of its properties, we believe the current strength of the physical market and 999-year leasehold status of some of its buildings, warrants CCT to trade close to its book value per unit of S$1.72 or an implied valuation of S$2,000 psf.

CCT announced the redevelopment of its Golden Shoe Car Park property. Subject to obtaining the necessary government approvals, the property will be developed into one with c.1m square feet (sqft) of commercial space in terms of gross floor area (GFA) and comprise an office tower of up to 280 metres high.
Upon completion in 2021, the property will provide a medium term uplift to CCT’s current NAV per unit of S$1.72.

Our DCF-based TP of S$1.70 implies a price of c.S$2,000 psf for CCT’s Singapore portfolio.

A key risk to our view is new office supply causing spot rents to fall below S$7 psf, which is likely to lead to lower-than-expected asking rents and rental income.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-01-04

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