CCT – OCBC

Asset enhancement at 6 Battery Road

Asset enhancement at 6 Battery Road. Last week, CapitaCommercial Trust (CCT) unveiled its asset enhancement initiative (AEI) at 6 Battery Road (6BR). The upgrade will focus on improving the building’s energy efficiency, environmental sustainability, as well as the facilities in the building. The AEI will commence in Oct 2010 and carried out in phases until 2013 in order to minimize the inconvenience to its tenants. Upgrading of common facilities ground floor lift lobby, turnstiles and reception area will start first while the enhancement of office space will be carried out upon the lease expiry of tenants. The building will remain tenanted during the upgrading period. Estimated capex for the AEI is ~S$92m and the cost is equivalent to 8% of the building’s valuation at the end of Dec 2009.

Positioning for long term growth. With Nomura likely to move out of 6BR to Marina Bay Financial Centre and Standard Chartered downsizing its office space in 6BR by 70,000 sq ft when their leases expire, near term outlook for CCT remains challenging. Nevertheless, we view this AEI positively. We believe that the completion of the upgrading works will place 6BR in a better position to compete with the newer office buildings and thus leading to higher rental rates. The AEI is expected to complete in 2013 and with no new supply of new office space in that year, we believe that CCT will have better bargaining power to negotiate for higher rental rates from its tenants.

Maintain BUY. According to CCT, the AEI is expected to generate incremental gross revenue of S$9.2m pa and incremental net property income (NPI) of S$7.4m pa. Management estimates that 20% of the incremental NPI (~S$1.5m) will come from cost savings due to reduction in energy consumption. The other 80% of the increment NPI (S$5.9m) will come from higher rental rate that the building is expected to achieve post-AEI. However, we think that it is too early to make any adjustments to our rental assumptions from 2013 onwards as there is still a lack of clarity on the recovery in office rents, which will depend on the take-up rate of the upcoming supply of office spaces in 2010-2012 and the sustainability of the economic growth. As such, we leave our estimates unchanged. Our fair value also remains at S$1.26. With a total return of 16.4%, we reiterate our BUY rating on CCT.