What is in the news?
CapitaGreen acquisition boosted gross revenue by 9.6% (Without acquisition: -1.2%)
Negative rental reversions and lower occupancies hit revenue and NPI in One George Street and Capital Tower. Despite the drop in tenant retention from 83% to 62%, portfolio occupancy remained high at 97.1%. CCT has managed to maintain occupancy at such levels even through GFC. (low was 94.8% in 2009)
Minimal occupancy risk in FY17. But FY18 could be worse than FY16 and FY17 for rental reversions. With only close to 5% of leases expiring in 2017, CCT could be pretty insulated this year. Nonetheless, we expect office rents to recover only in 2018 and negative rental reversions in FY18 to be worse than FY16 and FY17 as most of the expiring leases then are signed close to the peak in office rentals in FY15. ~14% of leases expire in 2018. Vacancy risks are low given the central locations of CCT’s properties but property gross revenue could take a hit from lower reversions.
Golden Shoe Car Park (GSCP) re-development commencement expected in 2H17. Estimated completion of GSCP could clash with potential release of 1m sq ft of competition office space. Management targets completion of GSCP redevelopment to be in 2021. With an estimated GFA of 1m sq. ft. of new commercial space in this project, the completion timing could coincide with the launch of the IOI Group’s new office project also in CBD. IOI’s project is expected to yield at least 1m sq. ft. of office space. Average annual net demand from 2010 to 2014 was 1.2m sq. ft.
Net office demand likely to have bottomed in 2016.
We think net office demand could have seen a bottom in 2016 and would likely pick up in 2017 on the back of stabilising and gradually improving economic conditions especially in developed US and Europe. The huge supply in 2017 though could force rents to see a bottom only in 2018.
At an FY17e yield of 6% and Price/NAV of close to 0.9, CCT is trading close to the average yields of 5.67% since 2010 (post GFC). On the back of improving office demand, we upgrade our “REDUCE” call on CCT to “NEUTRAL” with a higher DDM-derived target price of S$1.63 (from S$1.29).