CCT – DMG

Weak market sentiment going forward

1Q12 DPU in line with expectations. CapitaCommercial Trust (CCT) reported 1Q12 DPU of 1.90S¢ (+3.3% YoY), equivalent to 24.3% of our FY12 DPU estimate. Revenue and net property income came in at S$87.4m and S$69.9m respectively. Although gross revenue fall by 3.9% YoY NPI came in flat as operating expenses dropped by 17.1%. In the subsequent quarters, we expect CCT to register a slight growth in DPU, mainly from additional contribution from the recently acquired building at Twenty Anson Road. Although leasing activities have remained active during 1Q12, we expect the pressure on office rental rates to continue to remain high due to 1) weakening absorption rate for office space amid global economic uncertainty, 2) rising available office space from the secondary market and 3) negative reversion to continue as 1Q12 Grade A and island wide Grade B office rent fell by 3.6% and 1.3% respectively QoQ. We maintain our NEUTRAL call on CCT with an unchanged DDM based (COE: 8.7%; TGR:2.0%) TP of S$1.38.

More space from secondary market expected. During the 1Q12, office stock reached 52.8m sf on the back of 1.3m sf from MBFC Tower 3 completion. Although net absorption for this period grew positively to 587,000 sf (as compared to 93,313 in 4Q11), going forward, we expect sizeable amount of stock from the secondary market to be released as major financial companies move their offices out of the existing buildings to new facilities when their leases are due.

Weak market sentiment for offices. As indicated by CBRE, occupancy rate island-wide during the 1Q12 came in at 92.7%, a drop of 57bps QoQ (-162 bps YoY). Concurrently, Core CBD occupancy rate was noted to have fallen to 90.7% from 91.2% in the previous quarter. During 1Q12, both Grade A and island wide Grade B office rents also declined to S$10.60 psf/mth (-3.6% QoQ) and S$7.25 psf/mth (-1.3% QoQ) respectively. Going forward, we have projected a 10% negative rental decline in 2012.

Limited room for growth in 2012. Due to the expected weak market sentiment for offices together with negative rental reversion and the loss in income due to lower occupancy rate in some of CCT’s properties, we believe there are limited room for growth in near term. At this juncture, we continue to maintain our NEUTRAL rating on CCT and TP of S$1.38.