CCT – UOBKH

Leveraging on positive rental reversion

CapitaCommercial Trust (CCT) invests in income producing real estate used for commercial purposes. It owns nine properties in Singapore with 2.3m sf of office space, which accounted for 7% of private office stock within Downtown Core. CCT has a 30% stake in Quill Capita Trust (QCT), a commercial REIT listed on Bursa Malaysia. It has a 7.4% stake in Malaysia Commercial Development Fund (MCDF), which is the largest private real estate fund in Malaysia focusing on investments in Kuala Lumpur and the Klang Valley. CCT was assigned corporate rating of A3 with stable outlook by Moody’s Investors Services.

Huge room for rental reversions. Rentals for prime office space within Raffles Place and Marina Bay area has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07, a result of supply crunch coupled with strong demand from financial institutions and oil & gas companies. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07. According to CB Richard Ellis, rentals for Grade A office space could average S$18.50psf pm by end-2008, a further increase of 7.9%. CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply coming on stream is fairly limited.

54% of office space at 6 Battery Road is up for renewal in 2008 and 2009. We understand that Standard Chartered has renewed leases for 130,000sf at average rate of S$14.95psf pm for three years in Jan 08 compared to previous rate of S$7.00psf pm. 53% of office space is up for renewal in 2008 at Robinson Point with existing rent at only S$4.00psf pm. 53% of office space is up for renewal in 2009 at Raffles City Tower with existing rent at only S$3.40psf pm. Positive rental reversion from these prime office buildings provides revenue growth of 14.8% in FY08 and 12.4% FY09.

Redevelopment for Market Street Car Park. CCT has secured Outline Planning Permission for the redevelopment of Market Street Car Park into a premium Grade A office tower with estimated net lettable area (NLA) of 680,000sf. Management estimated that the site cost between S$1b to S$1.5b to be redeveloped, depending on the amount of development premium imposed. Construction is likely to commence in late-08/early-09 and completion by 1H2012. The project is likely to be undertaken by a JV with option for CCT to repurchase at a later stage when rentals have stabilised. Sponsor CapitaLand is the most likely JV partner. We believe a 50:50 JV is possible, particularly if the project is developed in phases.

No risk from refinancing. CCT’s current gearing is low at 24% in Dec 07. The company issued S$150m 3-year medium term note with attractive fixed interest rate of 3.05% in Mar 08. This has largely satisfied its funding requirements for refinancing short-term borrowings and the acquisition of Wilkie Edge, a mixed development project at Selegie Road.

CCT plans to expand asset size from current S$5.3b to S$6b by 2009. Potential pipeline of acquisitions from sponsor CapitaLand includes One George Street with NLA of 448,000sf. There is also latent potential to redevelop Golden Shoe Car Park. CCT provides FY08 distribution yield of 5.12%, a healthy spread of 3.04% over 10-year Singapore government bond yield at 2.08%.