Revamp works to weigh on CapitaLand Commercial Trust's income

It could lose $23m-$25m of income if 21 Collyer Quay is closed for a year.

CapitaLand Commercial Trust’s (CCT) may see its FY 2020-2021 distribution per unit (DPU) fall between 0.6-0.9% after factoring in an income vacuum from its proposed asset enhancement initiative (AEI) works at 21 Collyer Quay and Six Battery Road, a report by CGS-CIMB revealed.

Whilst the overhang will be lifted for the property after the firm announced it had secured coworking space provider WeWork Singapore to replace the tenant hole HSBC will leave behind in April 2020, there will be some downtime during the changeover as CCT plans to undertake a $45m redevelopment project. The entire building, which contributed an approximate 5% of CCT’s H1 2019 income, will be closed from Q2 2020 to Q4 2020.

According to a separate report by DBS Equity Research, assuming 21 Collyer Quay is closed for a year, CCT could lose between $23m and $25m in net property income (NPI).

CCT’s NPI was up 2.1% YoY to $185.2m in H1 2019, whilst its revenue edged up 3.2% YoY to $200.7m. It attributed its strong performance primarily to its acquisition of Galileo, which offset the impact from its divestment of Twenty Anson in August 2018. Higher gross revenue from AST2, 21 Collyer Quay and Capital Tower also countered lower contributions from Bugis Village and Six Battery Road.

Also read: CapitaLand Commercial Trust NPI up 2.1% to $158.2m in H1

Meanwhile, the firm is set to conduct a $35m AEI in phases from Q1 2020 to Q3 2021 at Six Battery Road upon the expiry of Standard Chartered Bank’s lease in 2020. DBS analysts Mervin Song and Derek Tan noted that whilst Standard Chartered will remain as an anchor tenant and continue to lease office space and house its flagship branch in the property, it is unclear whether Standard Chartered will give back space.

“There is some risk in our view, as we understand Standard Chartered has sublet some of its space. Mitigating any potential loss in income is the fact that this space missed the AEI that was undertaken in 2013 upon which CCT could charge a higher rent,” they said.

Subject to government approval, the AEI at Six Battery Road will include a new 24/7 through-block link connecting Raffles Place to the Singapore River, along with new food and beverage (F&B) offerings. CCT is targeting a return on investment (ROI) of approximately 8% at Six Battery Road, after its last AEI at the property in 2013 achieved an ROI of 8.6% on a $85.8m investment.

That said, the impact of its AEI works is expected to be partly offset by new contributions from its proposed acquisition of a 94.9% interest in Main Airport Center (MAC) in Frankfurt, Germany for $387.1m.

Also read: CapitaLand Commercial Trust to buy 94.9% interest in German freehold office for $387.1m

MAC is a multi-tenanted office building in Frankfurt with a total net lettable area (NLA) of approximately 60,200 sqm. Of this, approximately 53,900 sqm is high-specification office space and the remaining 6,300 sqm is ancillary space housing a conference hall, meeting rooms and 1,510 car park lots. The committed occupancy of the property was approximately 90% as at 30 June.

“Post purchase, the exposure to overseas markets would increase to 8% of AUM. At an acquisition yield of 4% and low funding cost of c.1.1%, CCT expects to achieve pro forma DPU accretion of 1-2.5%,” CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei noted.