SINGAPORE (Oct 24): Market watchers are divided over CapitaLand Commercial Trust (CCT).

The REIT has a battery of Grade A office buildings in the heart of the central business district. But the office market in Singapore has weakened, with corporates becoming more cautious amid prolonged macroeconomic uncertainty.

At the same time, there have been increasing concerns on the outlook of the co-working space, which CCT has exposure to.

To be sure, CCT has managed to register strong rental reversions despite the cautious outlook.

DBS Group Research notes that CCT recorded positive rental reversions ranging from 5% to 23% in 3Q19.

The highest rental reversions came from Asia Square Tower 2 (AST2), while above-market rents were signed at AST2 and Six Battery Road, lead analyst Rachel Tan says in a flash note on Thursday.

“This should translate into higher income over the coming quarters,” she adds.

Yet, investors are turning jittery. Units in CCT have slipped more than 11% from its recent peak of $2.30 on July 5.

For the 3Q19 ended September, CCT turned in a flat distribution per unit (DPU) of 2.20 cents, unchanged from a year ago. This brings 9M19 DPU up 1.9% to 6.60 cents, which is in line with analysts’ estimates.

3Q19 distributable income grew 2.6% to $84.8 million, as gross revenue rose 3.3% to $103.8 million and net property income (NPI) edged up marginally by 0.9% to $81.1 million.

The increase was largely attributed to higher revenue from Asia Square Tower 2 (AST2), 21 Collyer Quay, and Capital Tower, as well as contributions from Main Airport Center (MAC) in Frankfurt, Germany.

In addition, a one-off compensation sum of $2.1 million from a tenant at AST2 for early surrender of lease also contributed to the increase.

See: CapitaLand Commercial Trust posts flat 3Q DPU of 2.20 cents

“We maintain our ‘buy’ rating and target price of $2.30 as it continues to be the go-to Singapore office proxy,” says Tan.

According to Tan, key catalysts that could drive CCT include healthy rental reversions sufficient to buffer potential moderation in spot rent growth, redevelopment and asset enhancement initiatives (AEIs) to improve portfolio quality driving medium-term growth, as well as inorganic growth potential.

However, Tan cautions: “Our investment thesis could be derailed if economic growth continues to weaken and eventually impacts new demand for office space.”

And the way analysts at OCBC Investment Research see it, there is a real risk of a slowdown in macroeconomic conditions that may impact business sentiment.

“Notwithstanding the strong leasing momentum seen over the past few quarters, we believe the overall Singapore office market has softened, with corporates becoming more cautious,” OCBC says in a Thursday report.

The brokerage notes that while office rentals in Singapore continue to gain traction, growth has been moderating.

OCBC is keeping its "hold" call on CCT with a fair value estimate of $1.92.

However, the analysts at both DBS and OCBC note that CCT has secured two new leases at CapitaSpring, a property under development, which is held through CCT’s 45.0% interest in Glory Office Trust and Glory SR Trust.

One of the two new tenants is The Work Project – a 50%-owned associate of CapitaLand – which is leasing one floor of the building totalling 22,000 sqft.

“The Work Project has committed to a 7-year lease from September 2021 to August 2028 for a total estimated rental payable of $22.7 million, implying an average rental rate of S$12.28 psf/month,” says DBS’ Tan.

The two new leases bring CapitaSpring’s pre-committed occupancy to 31%, from 24% previously.

“In addition to the traditional priorities of location, specifications and cost, there is clear growing occupier expectations around building amenities and enhanced landlord service offerings,” says Lim Lay See, senior executive director of Office Services at CBRE, which has been appointed the exclusive marketing agent for CapitaSpring.

The way Lim sees it, there is expected to be “continued transformation” in the positioning of office space.

“The overall experience for end-users is becoming a key consideration in choice of building. Tenants are increasingly looking at the work environment as a major contributor to talent attraction and retention,” Lim says.

Lim adds that projects such as CapitaSpring will enable landlords to build stronger relationships with their customers.

“In the longer run, this will generate more sustainable income growth,” she says.

As at 12pm on Thursday, units in CapitaLand Commercial Trust are trading flat at $2.04.

According to DBS valuations, this implies an estimated price-to-earnings (PE) ratio of 24.9 times, a price-to-net asset value (P/NAV) ratio of 1.1 times, and a distribution yield of 4.4% for FY19F.