SINGAPORE (June 8): DBS Group Research is upgrading its recommendation on CapitaLand Commercial Trust (CCT) to “buy” with an increased target price of $1.95 from $1.55 previously.

This upgrade is led by the upgrade and repricing of CapitaLand Mall Trust (CMT), which will be merging with CCT.

See: CMT, CCT propose merger to create largest REIT in Singapore, third largest in Asia Pacific

In a Monday report, lead analyst Rachel Tan says “Assuming the merger will proceed as planned, we believe CCT will ride on the phased reopening of retail malls within CMT’s portfolio while being positioned for the progressive recovery in the office sector when GDP starts to recover from 2Q20.”

In addition, average expiring rents at $9.37-10.68 psf per month in FY20-FY22 provides buffer to maintain positive rental reversions. Spot office rents have increased some 29% from the lows in 1H17, reaching $11.55 psf per month at the end of 4Q19, according to CBRE estimates.

Meanwhile, CCT’s newly refurbished office space in the central business district (CBD) area could be a silver lining if demand recovers faster than expected.

“While we acknowledge that CCT has upcoming supply from CapitaSpring (expected completion in FY21) and expected vacancies from tenants’ movement prior to COVID-19, it could be a silver lining if demand recovers faster and stronger than expected as it is possibly the only REIT with some new/newly refurbished office space in the CBD expected to complete in FY21 with minimal net office supply in downtown core in FY20F-FY22F,” says Tan.

The redevelopment of Golden Shoe Car Park in the CBD is also expected to be completed in 1H21. Thus far, CCT has secured JP Morgan as an anchor tenant, which will occupy 24% of the office space in the building.

“The property will provide a medium-term uplift to CCT’s earnings and its current NAV per unit (excluding distributions) of $1.79,” says Tan.

The analyst also expects CCT’s overseas properties, specifically its recently acquired Galileo office building in Frankfurt Germany, to provide another leg of growth, but more importantly to limit downside risk to CCT’s book value given Galileo’s freehold status.

As at 11.05am, units in CCT are trading at $1.84 or 25.1 times FY20 earnings, with a distribution yield of 4.1%.