CCT still mulling Market Street Car Park project despite official nod

CAPITACOMMERCIAL Trust (CCT) confirmed yesterday that it has obtained provisional permission for the redevelopment of Market Street Car Park, but stressed that it has not decided if it would embark on the project.

CCT was responding to a BT report last Saturday, which said that the commercial real estate investment trust received provisional permission in November last year to turn Market Street Car Park into an office tower.

Market Street Car Park is located at 146 Market Street and its lease expires in 2073. The new office building could have a gross floor area of around 854,400 square feet.

CCT said that its manager was evaluating the redevelopment and ‘has not arrived at any decision at this point’. It advised unitholders to exercise caution in trading CCT units as there is no certainty that the proposed project would materialise.

Back in January 2008, CCT announced that it had obtained outline planning permission (OPP) to redevelop Market Street Car Park into a Grade A office tower.

The authorities granted the OPP on two conditions: there would be no extension of the present lease, and CCT would have to pay a development premium equal to 100 per cent of the enhancement in land value. CCT estimated then that the total project cost would be $1 billion to $1.5 billion.

Later in 2009, CCT dropped the project, citing its significant size, the high redevelopment cost, an uncertain market outlook and tight credit conditions as reasons. The OPP was allowed to lapse.

CCT said yesterday that its manager submitted a new application and obtained provisional permission for the redevelopment of Market Street Car Park as part of a portfolio evaluation exercise.

‘However, material issues, such as the determination of the differential premium payable to the Singapore Land Authority for the lifting of the title restriction of the property and other matters, are still being evaluated,’ CCT added.

‘It is premature to make any definitive conclusion regarding the feasibility of the proposed redevelopment.’

On the stock market yesterday, CCT lost three cents to close at $1.43.

CCT gets provisional nod to redevelop Market Street Car Park

Opportune time to revisit office project as rents recover

PLANS to redevelop Market Street Car Park into an office building could be back on track, now that its owner CapitaCommercial Trust (CCT) has obtained provisional permission for the project.

The Urban Redevelopment Authority (URA) gave the tentative nod in November last year. The new office building could have a gross floor area of around 854,400 square feet. There are no details on the number of car park lots that it may have.

Market Street Car Park, at 146 Market Street, has 704 car park lots. It also has retail and food and beverage outlets on the ground floor. Its lease expires in 2073. A number of industry watchers have been expecting CCT to trigger redevelopment plans for Market Street Car Park again, as it looks for ways to deploy capital this year.

Back in January 2008, the commercial real estate investment trust (Reit) said that it had gotten outline planning permission (OPP) to redevelop Market Street Car Park into a Grade A office tower.

The authorities granted the OPP on two conditions: there would be no extension of the present lease, and CCT would have to pay a development premium equal to 100 per cent of the enhancement in land value. CCT estimated then that the total project cost would be $1 billion to $1.5 billion.

The global financial crisis foiled CCT’s plans. In January 2009, it said that it would drop the project because of its significant size, the high redevelopment cost, an uncertain market outlook and tight credit conditions.

CCT later divested two office buildings and prepaid a secured term loan. With the recovery of the office market, and an investment capacity of up to $1.6 billion, it is back looking for investment opportunities this year.

Several analysts have flagged the redevelopment of Market Street Car Park as a possible venture, given the difficulties of making yield accretive acquisitions in today’s market.

Lower construction costs – compared with levels before the financial crisis – could also make the project more attractive.

‘We continue to expect the redevelopment of Market Street into a Grade A office building,’ said Standard Chartered research analysts in a Jan 20 report. ‘We calculate that the project is likely to cost $1-1.07 billion, including $500-600 million of development charges.’

CCT might have to undertake the redevelopment with a joint venture partner as development projects cannot exceed 10 per cent of a Reit’s asset size, said Macquarie Equities Research analysts in a Jan 19 note.

Cushman & Wakefield Singapore vice-chairman Donald Han said that he believes that it is an opportune time to revisit the project. Office rents have been recovering, and if redevelopment takes place in the next 12 months, the new building could be ready in 2013 or 2014 when the office market would be in ‘full swing’, he said.

However, ‘a lot of the new buildings are now being built with tighter car park ratios’, he said, adding that the potential removal of car park lots would affect the parking situation in the central business district.

Deep pockets, but what’s next?

Event

• CapitaCommercial Trust (CCT) reported an FY10 DPU of 7.8 cents, in line with expectations. Net property income declined marginally by 0.4% to $299m despite a 1.3% fall in gross rental income, due to lower OPEX and property tax. We remain cautious in view of the possible downward pressure on rents when more of the new supply comes on‐stream. Maintain HOLD.

Our View

• CCT’s Grade A office space continues to enjoy full occupancy as of end‐2010, but Six Battery Road suffered a 3% drop in gross revenue due to negative rental reversion. Management alluded that some of its existing tenants require space for expansion, but we remain mindful that nearly half of the new office supply coming on‐stream in 2011 has yet to be committed, which may limit CCT’s pricing power when it comes to seeking new tenants or retaining existing ones.

• After accumulating a warchest of more than $700m from the divestment of Robinson Point and Starhub Centre last year, CCT will pare down $242.6m of debt, saving about $7m of interest expense per year. CCT is exploring various refinancing options for its remaining debt, possibly by taking longer‐maturity loans of five years or more.

• The management intends to hold on to the remaining cash of about $535m for potential acquisitions. CCT has a potential investment capacity of $1.6b at its disposal, assuming a gearing of 40%. However, with other office buildings transacting at cap rates of 4% or less, it remains a challenge for CCT to find attractive acquisitions.

Action & Recommendation

While CCT has done well to maintain occupancy rates for now, it remains to be seen if it will be at the expense of softening rents when more International Grade A space gets completed in 2011 and 2012 (increasing the office stock in the Central region by nearly 3% p.a.). Maintain HOLD with a DDM‐derived target price of $1.25.

All the right moves; poised to benefit from rental Recovery

Estimated 4Q10 DPU of 1.94 S cents. CCT’s 4Q10 gross revenue of S$92.1m dropped 10.8% YoY and 5.8% QoQ. Similarly, NPI fell 11.4% YoY and 7.08% QoQ to S$70.9m. Estimated 4Q10 DPU is 1.94 S cents, which is 3.2% above 4Q09 DPU of 1.88 S cents. The income declines were largely driven by the loss of rental income following the divestments of Robinson Point and Starhub Centre. There were also elements of negative rent reversion, as the expiring leases were contracted during the highs of 2007-2008.

All the right moves. In previous reports, we were concerned that CCT’s excess cash1 on the balance sheet could result in a cash drag, especially in this persistently low interest environment. In light of no further acquisition in sight, we were delighted that CCT had chosen to pare down its debt in 4Q10. It has prepaid its S$142.6m term loan, expiring in Jun 2012, using existing cash balance in Dec and will be repaying another S$100m MTN maturing on 24-Jan 2011. Following this, its gearing will be lowered to 27% from 31.5%. The prepayment has also unencumbered another of its assets (HSBC Building), increasing CCT’s number of unsecured assets to 7 out of 9. We continue to like CCT’s prudent capital management. It is able to maintain financial flexibility by having a large portfolio of unencumbered assets and reasonably low gearing, and yet having the nimbleness to acquisition growth opportunities when these arise. Assuming a gearing of 40%, CCT now has additional debt headroom of S$1.2B, which it can focus on investment opportunities. The challenge, however, lies in sourcing for yield-accretive Grade-A office acquisitions. Capital values of CBD office space have appreciated some 20%-25% YoY, on the back of heated investment sales2 , which some argued were driven by the conversion of office to residential use.

Positive rent reversion after 2011. CCT’s portfolio occupancy improved to 99.3%, from 94.8% a year ago. We were particularly impressed that the manager was able to uplift Wikie Edge’s occupancy from 78.4% in 3Q10 to 98.4% in 4Q10. According to our estimates, Grade A office rents will hit S$10.50 psfpm in 20113, more than S$11 psfpm in 2012 and above S$12 psfpm in 2013. We thus forecast CCT to continue to experience negative rent reversions in 2011 , but this should change in 2012. With its near 100% occupancy and active leasing strategy, CCT is poised to benefit from the rental upside ahead. We thus upgrade CCT’s rating to BUY, with a RNAVderived fair value of S$1.61 (10.3% total returns)

1 CCT received net proceeds of S$578.lm following the divestments of Robinson Point and Starhub Centre on 19 Apr 2010 and 16 Sep 2010 respectively.

2 According to CBRE, more than S$5 billion of office buildings have changed hands in 2010. Grade A office buildings are also benchmarked at about $2,400-$2,500 psf (end 2010), whereas a year ago, arguably it was below $2,000 psf,

3 According to CCT, its average Grade A office rent of leases expiring in 2011, 2012 and 2013 are S$13.77 psfpm, S$10.01 psfpm and S$7.73 psfpm respectively.

CCT Q4 distributable income rises 3.4% to $54.7m

CAPITACOMMERCIAL Trust (CCT) yesterday reported a 3.4 per cent climb in distributable income to $54.7 million for the fourth quarter ended Dec 31, 2010, from $52.9 million a year ago. Distribution per unit (DPU) rose from 1.88 cents to 1.94 cents, the office landlord partly owned by CapitaLand said.

Distribution rose even as net property income fell 11.4 per cent from $80 million to $70.9 million as CCT sold off two assets – StarHub Centre and Robinson Point – over the year. For the whole financial year ended Dec 31, 2010, CCT reported distributable income of $221 million, some 11.3 per cent above 2009. The DPU for 2010 works out to 7.83 cents and is a 10.9 per cent increase from 2009’s 7.06 cents.

For this year, CCT expects negative rent reversions for the leases expiring in 2011, which will hit the trust’s operating revenue for this year. ‘Despite the (recent) upturn, prime office rentals are still approximately 48 per cent below the peak achieved prior to the recent global financial crisis. As a result, negative rent reversions are expected for the leases expiring in 2011. This will negatively affect the trust’s operating revenue in 2011, although the impact should be mitigated by generally rising office rental rates,’ said CCT.

But demand for its properties is still strong, CCT stressed. ‘In tandem with the optimistic economic outlook for Singapore and Asia, the resultant office market recovery and our proactive tenant engagement, we continue to experience positive growth in office demand from our tenants,’ said Lynette Leong, chief executive of the trust’s manager.

She acknowledged that some of CCT’s tenants have taken up new space in other buildings. But other existing tenants are also looking to expand within CCT’s properties, she said, adding: ‘That demand will help to backfill whatever vacancy is created by tenants leaving for other buildings.’

Ms Leong also said that CCT is on the lookout for Grade A office space within the central business district to buy and add to its portfolio.

‘The trust has internal resources and debt capacity to seize investment opportunities of up to $1.6 billion without exceeding the gearing of 40 per cent,’ she said.

The trust also gave an update on its Six Battery Road property, which is undergoing asset enhancement works. Of the 65,600 square feet of lettable area expected to be upgraded and available in 2011, 52 per cent has already been pre-leased to new and existing tenants, CCT said.

CCT shares rose 2 cents to close at $1.53 yesterday.