SINGAPORE (June 25): OCBC Investment Research is downgrading CapitaLand Commercial Trust (CCT) to “sell” with an unchanged fair value estimate of $1.88, after the stock saw its share price surge 22.3% so far this year.

In a Monday report, OCBC’s research team says the run-up had been supported by a flight to defensive safe names and a dovish bias from the US Federal Reserve.

But now, the Fed is expected to shift its policy stance.

At the Federal Open Market Committee (FOMC) meeting in June, the Fed dropped the word “patient” from its statement, even as it kept the benchmark interest rate unchanged at 2.25%-2.5%.

Eight of the committee members also indicated that they were open to one rate cut this year.

“Based on the Fed funds futures rate, there is a 100% probability of at least one rate cut this year, while the probability of 2-3 rate cuts is high at above 70%,” OCBC says.

The brokerage estimates that CCT will see a lower FY19 distribution yield of 4.3%, or 4.2% according to Bloomberg blended forward 12-month consensus.

“We would have to go all the way back to November 2007 when CCT last traded at such tight valuations in terms of absolute yield,” says OCBC.

Nonetheless, OCBC acknowledges that the trust’s high quality portfolio will remain resilient, with weighted average lease expiry (WALE) by net lettable area standing at 5.7 years as at end-1Q19.

However, the brokerage warns that CCT would not be immune to the vagaries of the macro environment.

“In a slower growth scenario, business sentiment would take a hit, consolidation of businesses would continue and going beyond 2019- 2021, a bumper crop of office supply awaits in 2022,” OCBC says.

As at 3.10pm, units in CCT are trading at $2.14 with a FY19 price-to-NAV ratio of 1.2 and a DPU yield of 4.3%.