CapitaLand Commercial Trust gets lead in office market recovery with acquisitions

Net property income rose 3.4% thanks to its Galileo and Asia Square Tower 2 buys.

CapitaLand Commercial Trust (CCT) can expect medium-term upsides from its acquisition of Asia Square Tower 2 and the planned redevelopment of Golden Shoe Car Park, according to a report by DBS Equity Research.

CCT had a strong start to the year with its Q1 2019 distribution per unit (DPU) rising 3.8% YoY to 2.20 cents thanks to the acquisition of Galileo and Asia Square Tower 2. The firm’s revenue and net property income (NPI) also jumped 3.5% and 3.4% YoY, respectively, during the quarter as a result of these acquisitions, CCT’s financial statement revealed.

Also read: CapitaLand Commercial Trust NPI up 3.4% to $79.80m in Q1

“We believe the acquisition of Asia Square Tower 2 in late 2017 is a medium-term boost to CCT. Specifically, it improves the quality and resilience of CCT’s portfolio, as it provides CCT the option to offer a property in the Marina Bay area should tenants decide to move from Shenton Way or Raffles Place,” DBS analyst Mervin Song explained in the report. “The expansion of CCT’s portfolio also provides additional leverage to the recovering Singapore office market over the coming three to four years.”

The firm also expanded overseas with its maiden acquisition of office building Galileo in Frankfurt, germany on a 4% NPI yield. Song said that they expect this to provide another leg of growth for the trust, as well as limit the downside risk to CCT’s book value given Galileo’s ‘freehold status’.

The analysts further added that with the sale of Twenty Anson, further expansion into Europe could provide additional upside to CCT’s earnings.

Meanwhile, the report revealed that CCT has a joint venture (JV) with its sponsor, CapitaLand and Mitsubishi Estate Co. (MEC) to redevelop its Golden Shoe Car Park property into a 635,000 sqft office tower with a 299-room serviced apartment block. CCT and CapitaLand will reportedly hold 45% interest each, with MEC owning 10%.

The project, which will be completed by H1 2021, is estimated to cost $1.82b with a targeted yield on cost of 5%. “The property will provide a medium-term uplift to CCT’s earnings and its current net asset value (NAV) per unit of $1.79,” Song highlighted. As of April 2019, CCT has reportedly secured JP Morgan as an anchor tenant, which will take 24% of the office space in the building.

Also read: Positive rental reversions could boost CapitaLand Commercial Trust

On the other hand, CCT was impacted by negative rental reversions in H1 2018 and 2017 as seen by the 5.2% YoY fall in Q1 2019 NPI for 40-storey Grade A office tower CapitaGreen. Meanwhile, CCT’s NPI for Six Battery Road also slipped 3.6% YoY as occupancy dipped from 99.8% to 97.6% in Q1 2019.

“We understand the space vacated by a tenant was one of the units that did not benefit from the asset enhancement initiative (AEI) conducted a few years back,” Song commented. That said, they noted that post-renovation and given the relative tightness in the Singapore office market, CCT may be able to backfill the space soon.

CCT’s other properties were generally stable with earnings from Raffles City Singapore benefitting from AEI works. A separate report by OCBC Investment Research (OIR) pointed out how CCT achieved positive rental reversions for leases signed over the quarter, with committed rents (psf/month basis) at AST2, Six Battery Road, One George Street and CapitaGreen coming in at $11.00-S$12.50, $11.70-$13.50, $9.50- $10.80 and $12.30-$13.30, respectively.

CCT’s overall portfolio occupancy remained high at 99.1%.

According to OIR’s analyst Andy Wong Teck Ching, this was underpinned by CCT’s good quality assets and continued momentum in Singapore’s office market. “Core Grade A CBD office rents rose 3.2% QoQ to $11.15 psf/month in 1Q19, the sixth consecutive quarter whereby rents grew more than 3% QoQ, based on data from CBRE,” he noted.

DBS’ report further highlighted that CCT’s construction of the CapitaSpring development remains on track with the building still slated for completion in H1 2021.

“In addition, we understand that CCT is continuing to make progress on plans to refurbish 21 Collyer Quay when HSBC vacates the building and moves to Marina Bay Financial Centre Tower 2 in 2020,” Song said, adding that the market is also awaiting on news whether CCT has been able to acquire Duo Tower.