Month: July 2010
A-REIT – DB
Hitting the industrial trail
Improving operating environment, solid execution
We continue to like AREIT’s defensive and well-diversified portfolio and solid execution of BTS projects. Enquiries have picked up with rents bottoming out amid the strong rebound in manufacturing. Our recent site visit revealed good progress with its ongoing development in CBP and a gradually improving operating environment for its other properties, which are generally highly specified and well located. Valuations are undemanding at 7.3% FY11e yield and 1.19x P/B for a market leader with an established track record. Buy.
Cementing its stronghold in Changi Business Park (CBP)
AREIT has been strengthening its foothold in CBP with the recent completion of Plaza 8 @ CBP and the acquisition of DBS Asia Hub. The partial BTS for Citibank is also progressing on schedule with completion expected in Feb next year (4QFY11). Its growing market share, coupled with limited new supply in the area and recovering demand has translated into rising pricing power. Signing rents are around S$3.50-3.70 compared to the low S$3.00 range a quarter ago. While the amenity centre is currently around 1/3 leased, we expect firm demand from F&B providers and other support services as the working population in CBP rises to c. 20-25,000.
Demand recovering; rents bottoming out
Industrial rents have turned around in 2Q, rising for the first time since 3Q08 as demand recovers. AREIT is seeing broad-based demand recovery across all segments with enquiries rising as tenants plan for expansion on the back of the strong rebound in manufacturing output, which rose 58.6% YoY in May. With demand/supply dynamics in other micro-markets comparatively weaker vis-à-vis CBP, rents are ticking up but at a slower pace. We expect overall occupancy rate for AREIT’s portfolio to stabilize and improve over the coming quarters.
Valuations undemanding; maintain Buy with DDM-pegged TP of S$2.23
AREIT is currently trading at 1.19x P/B vs LT avg of 1.33x and offering FY11E yield of 7.3% implying an attractive 489bps spread over the 10-year bond. We believe valuations are undemanding for an industrial market leader with high quality, well diversified portfolio and proven track record in BTS projects. Downside risks: reversal of growth trends impacting leasing demand, credit risk from tenants on long sale & leaseback leases, development risk and deterioration in credit markets
CCT – OCBC
Rising anticipation of Starhub Centre sale
Closer to selling StarHub Centre? Business Times reported late last month that CapitaCommercial Trust (CCT) could be close to selling StarHub Centre. GuocoLand and Frasers Centrepoint group were said to have participated in the expression of interest exercise. CCT has already obtained outline planning permission from URA to redevelop StarHub Centre into a residential (capped at 80% of GFA) and commercial property but has yet to receive approval from SLA for the lease of the site to be reset to 99 years. CCT is still evaluating all options with regard to the asset plan for StarHub Centre and no decision has been made yet.
Share price outperformed since the news report. Based on our earlier estimates, we believe that StarHub Centre could fetch between S$301.2m and S$361.9m if the buyer intends to redevelop it into a residential/commercial property. This would translate to a gain of S$33.2m (S$0.01 per share) to S$93.9m (S$0.03 per share) over its last appraised value of S$268m at the end of FY09. Since the report was published on Business Times on 24 Jun, the price of CCT gained 4.2%, outperforming its closest peer, K-REIT (up 1.8%), and the FTSE ST REIT index (up 1.2%) over the same period. We believe that the market is already anticipating the divestment of StarHub Centre in the near future.
Reinvestment of proceeds an uncertainty. Even though CCT could make a one-off gain from the divestment of StarHub Centre, DPU will be affected by the loss of income stream from StarHub Centre, which constitutes ~5% of CCT’s FY09 Net Property Income (NPI). And with CCT’s realigning its focus on Grade A office building investments, there is no assurance of a quick reinvestment of the divestment proceeds in incomegenerating assets at attractive prices to replace the loss income from StarHub Centre.
Downgrade to HOLD on valuation. With its 3Q10 results just around the corner, we are keeping our estimates unchanged for now. Our fair value remains at S$1.26, which is pegged at parity to our RNAV. Current share price of S$1.23 translates to an upside potential of 2% and with an estimated FY10 DPU yield of 5.9%, our projected FY10 total return for CCT is now 7.9%. With a lower upside potential now, we are downgrading CCT to HOLD on valuation ground. We also note that operationally, rental growth is still a concern, given the upcoming supply of new office spaces.
Shopping Malls – BT
Rents at suburban malls catching up with Orchard Rd
Upper levels in such malls already drawing higher rents than equivalent space in Orchard and Scotts area, says DTZ
Rents at suburban malls in Singapore are fast catching up with those for prime Orchard Road retail space as neighbourhood malls draw increasing shopper numbers and more interest from tenants.
The difference between prime Orchard Road rents and suburban rents narrowed to just 9 per cent in Q2 2010 – from as much as 24 per cent at the start of 2009 and 21 per cent in Q1 2005 – according to CB Richard Ellis (CBRE).
In fact, upper-storey space at these suburban malls is already more expensive than upper-storey space in the Orchard Road and Scotts Road area, according to data from DTZ.
The rental gap tightened as Orchard Road rents fell for the seventh consecutive quarter while suburban rents continued to edge up in the second quarter of 2010, CBRE’s data shows.
Prime Orchard Road rents fell to $31.10 per square foot per month (psf pm), reflecting a 3.4 per cent decrease from $32.20 psf pm in Q1 2010.
Suburban malls, on the other hand, saw a 1.4 per cent quarter-on-quarter increase in prime rentals to $28.50 psf pm.
And when it comes to retail space on the upper floors, suburban malls are in fact fetching more than their Orchard Road and Scotts Road counterparts.
According to DTZ, upper-storey rents at suburban malls inched up 0.4 per cent quarter-on-quarter to $22.90 psf pm in Q2 2010, while upper-storey rents in the Orchard Road/Scotts Road area stayed flat at $20.50 psf pm.
Analysts said that rents in the Orchard Road area are depressed after a large amount of new supply – from malls such as Ion Orchard, 313@somerset and Orchard Central – came onstream over the past year.
‘Competition in the Orchard Road and Scotts Road and other city areas has intensified and the increased range of retail choices has rendered consumers to be more selective in their purchases,’ said Anna Lee, DTZ’s associate director for retail.
‘Retailers, particularly in the newer malls, are adjusting to the vagaries of consumer preferences and resulting in early termination of leases in some cases,’ she added.
In contrast, rents in the suburban areas continued to edge up in the second quarter of 2010. Suburban malls, with their built-in catchment of shoppers and mass market offerings, largely performed better than malls in the city during the financial crisis.
These malls, which draw more and more shoppers every year, are now able to command higher rents from tenants.
‘Generally, 2009 shopper traffic at our suburban malls is higher than that in 2008,’ said a spokesman for CapitaMall Trust (CMT). CMT has eight suburban malls in its portfolio.
Frasers Centrepoint Trust (FCT), which owns four suburban malls, also said that footfall across its portfolio rose 6 per cent from the 2008 financial year (October 2007 to September 2008) to the 2009 financial year (October 2008 to September 2009). The figures exclude Anchorpoint, where traffic counters were removed for asset enhancement works.
The increased visitor numbers have translated into higher rents for both retail trusts.
FCT said that in the first six months of its 2010 financial year (October 2009 to March 2010), its portfolio achieved average rental reversions of 4.5 per cent. And for the suburban malls in CMT’s portfolio, the rate of average rental growth per year ranged from 1.1 per cent to 2.3 per cent in Q1 2010.
Developers are extremely bullish on the potential of suburban retail space here.
Australian developer Lend Lease, which paid $749 million for a mixed-use land parcel in the Jurong Lake district, intends to build a suburban shopping mall on most of the site.
Lend Lease, which owns the 313@somerset and Parkway Parade shopping malls here, is required to set aside a mandatory 30 per cent of the gross floor area for office use. But the remaining 70 per cent will be used solely for retail space, said Ooi Eng Peng, executive officer for retail and investment management in Asia for Lend Lease.
‘The mall will be the Parkway Parade of the west,’ Mr Ooi said. Suburban malls offer good prospects for developers who can come up with the right tenant and product mix for the surrounding catchment population, he added.
Looking ahead, the gap between prime Orchard Road rents and prime suburban rents will narrow even more over the rest of this year as Orchard Road rents dip further.
‘We expect prime Orchard Road rents to dip 5 per cent to 10 per cent in 2010 due to the settling of business and trading patterns,’ said Letty Lee, CBRE’s director for retail services. ‘But prime suburban rents are likely to see a 3-5 per cent upside in the same period, underpinned by catchment demand.’
But it is not all doom and gloom for malls on Singapore’s best-known street; analysts expect that over the next two to three years, rents in the Orchard Road will rebound.
MLT – Daiwa
A more challenging environment for acquisitions
3 (Hold) rating maintained
• We maintain our 3 (Hold) rating. MLT’s acquisition-growth strategy resumed in late-2009 when it picked up three assets, financed partly with a S$79m placement. After the acquisition announcement of another three assets for S$83.5m on 31 May 2010, which would take its leverage ratio above 40%, according to MLT’s estimates, we believe MLT’s equity-fundraising risk has risen.
• Moreover, unlike the heady capital-market conditions from mid-2005 to the end of 2007, MLT’s DPU yield is not low, and combined with a more cautious debt market, the DPU-accretion from recent acquisitions has not been compelling, in our view. We note that this situation is not unique to MLT and appears commonplace among the S-REITs following the financial crisis.
RNG valuation-derived target price of S$0.87
• Our six-month target price, based on parity with our RNG valuation (a finite-life Gordon Growth model) is S$0.87, on a par with its NAV as at 31 March 2010. Our valuation assumes a weighted (blended) cap rate of 6.9% for its investment-property portfolio and a blended cost of debt of 3.3%.
Major risk factor: another market disruption
• MLT’s acquisition-growth model depends on well-functioning capital markets and could stall again with a stock-market correction or other dislocation. MLT’s underlying organic growth of low single-digit percentages year-on-year (for DPU, based on our forecasts) appears pedestrian, in our view.
FCT – Daiwa
Risk-return looks favourable now, in our view
Rating upgraded to 2 (Outperform) from 3 (Hold)
• We have upgraded our rating to 2 from 3. Although we believe the price drivers are well-known, the risk-return ratio has improved after the most recent three-month unit-price correction, in our view. We maintain our six-month target price of S$1.46 based on parity to our RNG valuation (a finite-life Gordon Growth model).
Immediate catalyst from Causeway Point AEI
• FCT’s immediate price trigger could be management’s asset enhancement initiative (AEI) plans for Causeway Point, which accounts for more than 50% of the overall portfolio value. Our earnings forecasts, which assume passing rents rising to S$11/sq ft by FY13 (with no assumptions for asset enhancement) for Causeway Point, could be revised up on higher rental assumption guidance from management upon the announcement of the AEI. Other earnings and unit-price catalysts could come from a better-than-expected contribution from Northpoint 2, post the AEI, and better visibility on the future acquisition of Bedok Point and possibly One @ Changi City (a 127,490-sq-ft joint venture between the sponsor and Ascendas [Not listed] at Changi Business Park scheduled for completion in 2011).
Major risk: suburban retail is no longer a secret
• The keen investment interest in early 2010 for suburban shopping malls within the public-housing heartlands suggests to us that it might be difficult now for the sponsor to develop (at an attractive rate of return) any more of these prized assets. FCT eventually might have to find revenue growth in overseas.