CCT – RBS

Office offering

CCT may redevelop Market Street Car Park if it fails to acquire an existing grade A asset, in our view. We view this as a positive, given the low holding cost for the asset. CCT may not require to raise equity for any acquisitions, given its significant cash pile. We remain positive on the office sector. Reiterate Buy.

Potential redevelopment of Market Street Car Park?

We think the time is ripe for CCT to redevelop Market Street Car Park into a grade A office given good visibility on office rents and relatively low construction costs. If redeveloped, the property could be ready by 2013-14, during which time we expect office supply to be tight. We estimate a redevelopment cost of S$1,125 psf for a new grade A office on this site, which seems more attractive than the seller asking price of at least S$2,000 psf for existing grade A assets. However, CCT would have the capacity to redevelop only 60% of the asset solo, based on the regulatory limit. This is the main drawback for any redevelopment, in our view.

Sitting on a cash pile

We estimate CCT will sit on a cash pile of about S$780m after the sale of Starhub Centre. We also estimate it will have debt capacity to acquire up to S$0.8bn-1.4bn worth of assets based on a gearing of 40-45%. Hence the company may not need to raise equity once it acquires a grade A office or redevelops the Market Street Car Park.

Office leasing activities gather steam

Leasing deals for grade A offices have intensified, with financial institutions such as Citigroup and BoA in negotiations to move into the upcoming Asia Square Tower 1 and 50 Collyer Quay, respectively. Industry sources said that monthly rents are now transacted at S$8.50-10.00 psf vs S$7-8 psf for uncompleted offices at end-2009 and current average grade A rents of S$8.45 psf. Where previous preleasing involved companies effectively swapping office space, the firms are now increasing headcount. Therefore, for instance, BoA may be doubling its office space to 120,000 sq ft. Higher demand and a corresponding decline in office stock (due to conversions into residences) bodes well for the office sector. We estimate 2m sq ft of office stock will be removed from the system over the next two years.

Maintain Buy

We have a Buy rating on CCT with our DCF-based target price of S$1.50, which includes potential upside from the acquisition of a grade A office. We like CCT as we see it is the largest pure office play in Singapore. The REIT is expected to yield 5.4% in FY10 and 5.0% in FY11 and is trading on a par with its current book value of S$1.36.