CapitaLand Commercial Trust - DBS Research 2018-09-13: HSBC Extends Lease For Only One Year


CapitaLand Commercial Trust - HSBC Extends Lease For Only One Year

  • HSBC has signed a one-year extension at 21 Collyer Quay.
  • Renewal rents are 36% higher; one-year extension indicates HSBC's intention to vacate in 2020.
  • But ample time for CCT to backfill the space or maximise value through redevelopment or disposal of the property.
  • Maintain BUY, Target Price of S$2.12.

What’s New

  • CapitaLand Commercial Trust (CCT) announced that it has signed a one-year lease extension with HSBC for the whole of 21 Collyer Quay. The original lease with HSBC was scheduled to expire in April next year.
~ ~ Where SG investors share
  • Under the one-year extension agreement, HSBC will pay a rent of S$27.7m or equivalent to S$11.54 psf/mth (triple net basis) commencing from 30 April 2019. This is 36% higher than the original rent of S$20.4m per annum or S$8.50 psf/mth (triple net basis). ~ Where SG investors share
  • 21 Collyer Quay is a 200,000-sqft office building with a land tenure of 999 years, expiring on 18 December 2849 and contributed c.4% of CCT’s monthly gross rental income as at 30 June 2018. The last valuation as at 30 June 2018 was S$461.0m, equivalent to trailing NPI yield of 4.4%, cap rate of 3.5% or S$2,305 psf.
  • CCT also stated that in line with its proactive asset management strategy, it is evaluating options for the property after April 2020 which include refurbishment and re-letting, redevelopment and divestment.

Our Thoughts

  • As HSBC is extending the lease for only one year, this indicates a high likelihood that the company will be vacating 21 Collyer Quay in 2020. The potential buildings that HSBC could move into are the redeveloped CPF building (Ascendas-Singbridge), 8 Penang Road (Suntec REIT (SGX:T82U) |SG and Singhaiyi (SGX:5H0) |SG JV) and Funan (CapitaLand Mall Trust (SGX:C38U) |SG, all of which could accommodate its space requirements and are scheduled to be completed over 2019/2020.
  • This news is a disappointment as we had originally assumed that HSBC would extend its lease for a longer period although the rent for the one-year extension is higher than the S$10 psf/mth rent we had projected upon renewal by HSBC.
  • Nevertheless, should CCT decide to continue owning the building, it has another two years to find a replacement tenant, which is ample time. ~ Where SG investors share
  • Alternatively, given the higher demand for office buildings in Singapore with recent transactions at “tight” yields, there is potential for CCT to sell the building above book value to demonstrate the conservative valuation of its buildings and why it deserves to trade at a premium to book as implied by our Target Price.
  • For now, we maintain our BUY call and Target Price of S$2.12, pending finalisation of CCT’s plans for 21 Collyer Quay.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2018-09-13
SGX Stock Analyst Report BUY Maintain BUY 2.120 Same 2.120