CapitaLand Commercial Trust: Bottoming of office rents in sight July 21, 2017 839

PSR Recommendation: ACCUMULATE Status: Upgraded
Target Price: 1.80
  • 1H17 revenue, net property income, DPU within our estimates.
  • Further evidence of bottoming in office spot rents as rents were flat QoQ (vs -1.6% QoQ in 1Q17).
  • Compression in cap and discount rates increased portfolio valuation by 2.8% from Dec 2016.
  • DPU outlook stable as we believe partial divestment proceeds will be used for top-up.
  • We adjust upwards our DPU forecasts for FY17e/18e by 4.7%/10.8%.


The positives

+ Pace of drop in office rentals slowing: CBRE Grade A office market rents was flat QoQ for 2Q17. This follows 8 consecutive quarters of QoQ declines in office rents since 1Q15.

+ 6c boost in NAV from recent divestment gains: Recent divestments of Wilkie Edge (WE), One George Street (OGS) at 39% and 17% above Dec 2016 valuations respectively. Total divestment gains including GSCP at c.S$170mn. This translates to a c.6c boost in NAV, which is S$1.85 at 2Q17.

+ Positive impact on portfolio valuation due to cap and discount rates compression: Compression of 10-15bps for office portfolio boosted portfolio valuation by 2.8% from Dec 2016.

+ Management is committed to maintain DPU: We have assumed partial usage of divestment proceeds from WE and OGS and Golden Shoe Car Park (GSCP) to top up DPU.

The negatives

– Portfolio renewals still experiencing negative rental reversions: CCT’s average portfolio rent has declined QoQ since 3Q16, from S$9.22 to S$9.18 driven by negative reversions.

– Negative reversions likely to continue into 2018: Rents expiring next year would most likely have been signed during the period of peak rental in 2015. Rents have declined 21% since then. 15% of leases (by gross rental income) are due for expiry in 2018.


Bottom is in sight for office rents. Divested office properties were at attractive cap rates of 3.2% and 3.4%. Compression of cap rates signals optimism and a change in sentiment in the sector. A synchronised global economic recovery bodes well for office demand.

Upgrade to ACCUMULATE with higher target price of S$1.80 (from S$1.63)

Our DPU projection for FY17e/FY18e is 4.7%/10.8% higher than previous, after updating the following developments into our forecast: 1) Divestment of Wilkie Edge, 2) Divestment of Golden Shoe Car Park and capital requirements for redevelopment, 3) Effects of dilution from conversion of convertible bonds, 4) Cash top up using divestment proceeds to stabilise DPU to mitigate loss of income from sale of properties.

Figures 1 and 2: CCT trades at close to post GFC average dividend yields but above average Price/NAV


Figure 3: Peer comparison table


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