CCT – OCBC

Fresh catalysts needed; maintain HOLD

Rents are bottoming out. The Office Rental Index in 2Q registered an increase of 1.1% QoQ, buttressing the uptrend rental recovery since the start of the year, which pre-ceded six consecutive quarters of decline. Office rents have also turned around on the back of strong economy recovery and office demand, rising to an average of S$8.45 psf/month (up 5.6% QoQ) for Grade-A office space.

Office transactions pick up pace. Investment activity in the office market has also warmed up. With close to S$2.6b of deals done YTD, buoyed in part by the entry of foreign property funds and the economic recovery, transaction sizes were also larger and prices have hit $2,000 psf in 2H10 (versus S$3,000 psf peak in 2008). This was in stark contrast to the relatively bite-sized deals of less than S$200m during the financial crisis. We believe that CCT stands to benefit in this rising rental/demand environment, since it has a large exposure to Grade-A office space. And in anticipation of faster growing rentals for Grade-A offices, we also expect more tenants to make a ‘flight to quality’ to take advantage of the still narrow gap between Grade A and prime office rentals.

MSCP conversion unlikely. CCT first revealed its plan to redevelop Market Street Car Park (MSCP) into a new Grade-A office tower in 2008, with a GFA of 850k sf. But management was unsuccessful in topping up the leasehold duration for MSCP (expiring on 31 Mar 2073). The remaining period makes it unappealing for CCT to pursue the premium office conversion option any further, given that development works will probably take up at least another three years, leaving the property with a lease of less than 60 years.

Reinvestment risk. CCT is also sitting on a cash pile of some $750m following the sales of Robinson Point & StarHub Centre. The challenge, however, lies in sourcing for yield-accretive Grade-A office acquisitions, given the growing competition for quality commercial properties and CCT’s geographic focus within Singapore. And given the persistently low interest environment, having excess cash on the balance sheet could also result in a cash drag; but an option would be to pare down its debt.

Maintain HOLD. On the back of favourable conditions in the office sector, our RNAV-derived fair value for CCT rises from S$1.26 to S$1.50. But given the limited upside, with total return <10%, our HOLD rating remains; potential re-rating would need to come from further yield-enhancing acquisitions/redevelopment-projects.