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CapitaLand Commercial Trust kept at 'buy' by DBS with office rents on recovery road

Samantha Chiew
Samantha Chiew • 3 min read
CapitaLand Commercial Trust kept at 'buy' by DBS with office rents on recovery road
SINGAPORE (Oct 29): DBS is reiterating its “buy” call on CapitaLand Commercial Trust (CCT) with a target price of $2.12.
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SINGAPORE (Oct 29): DBS is reiterating its “buy” call on CapitaLand Commercial Trust (CCT) with a target price of $2.12.

This came on the back of the trust announcing a 3Q18 DPU of 2.20 cents, 8.9% higher than 2.02 cents reported in 3Q17.

Distributable income was 13.1% higher y-o-y at $82.7 million.

Gross revenue increased by 35.6% y-o-y to $100.5 million, bringing net property income (NPI) for 3Q18 to $80.4 million, 37.3% higher than $58.6 million last year.

See: CapitaLand Commercial Trust posts 8.9% higher 3Q DPU of 2.20 cents

Over the quarter, CCT’s rental reversions have started to turn more positive, with the REIT achieving higher signing rents at OGS and CapitaGreen. But signing rents for AST2 and Capital Tower were below expiring rents and there is not much difference between the committed and expiring rents for 6 Battery Road. This is in comparison to only a few quarters ago when all buildings were reporting negative rental reversions.

In a Monday report, lead analyst Mervin Song says, “Going forward with Grade A CBD office rents currently at $10.45 psf/mth and expected to climb higher next year, we expect CCT to report positive rental reversions as expiring rents for FY19 and FY20 are at $10.70 psf/mth and $9.55 psf/mth respectively.”

HSBC, CCT’s tenant at 21 Collyer Quay, has also extended its lease for another year before it relocated to Marina Bay Financial Centre Tower 2 in 2020.

See: HSBC lease extension at 21 Collyer Quay keeps CCT at 'buy'

“Upon HSBC vacating the building, we understand that CCT is reviewing options to re-lease the building or potentially dispose or redevelop the property. While the plot ratio has been maximised, we understand there is some inefficiency in the usage of space currently which a potential redevelopment would address,” says Song.

Meanwhile, the REIT has recorded lower gearing of 35.3% from 37.9% at end-2Q18 and lower cost of debt of 2.6% from 2.8%, following the divestment of Twenty Anson.

CCT has said that despite the Singapore authorities exercising their right to take back the leasehold title at Bugis Village on Apr 1 by compensating CCT $40.7 million, CCT has entered into a new one-year lease for the property from Apr 2019 to Mar 2020.

“The expected additional net income from the property is about $1 million. This is a positive surprise as we had previously assumed zero income from Bugis Village from Apr 2019 onwards,” says the analysts.

Elsewhere in Europe, the analysts expect the REIT to deepen its presence following its maiden acquisition in Frankfurt this year. Europe currently represents about 5% of the REIT’s portfolio by asset value. In the long term, CCT aims to have 10-20% of its assets outside Singapore.

“On the back of expectations of a multi-year recovery in office rents due to limited supply over the next few years, which should translate into higher rental income ahead, we reiterate our bullish view on CCT,” says Song and Tan.

As at 4.50pm, units in are trading 2 cents higher at $1.74 or 20.7 times FY19 book with a distribution yield of 5.1%.

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