Market Street Car Park set to stay – at least for now

CCT defers decision on redeveloping site into office building

CapitaCommercial Trust (CCT) has decided to defer its decision on the redevelopment of Market Street Car Park (MSCP) into an office building that could cost up to $1.5 billion.

Asked if the huge supply of new office space after 2010 was a determining factor, Lynette Leong, CEO of CCT manager CapitaCommercial Trust Management Ltd (CCTML), said: ‘No, the main reasons are the significant size of the redevelopment, rising construction costs, present volatility in financial markets and the unknown development premium amount, which have caused us to defer the decision on the planned redevelopment, such that it will not be made any earlier than mid-2009.’

Ms Leong also added that CCTML is ‘carefully evaluating the financial viability of and the funding structure for the redevelopment’.

‘We are not concerned about the new office supply after 2010 given that statistics show that office demand for good-quality office space is still strong and that the lease pre-commitments for the new supply have also reached a high level. For example, about 52 per cent of the office space at Marina Bay Financial Centre has been pre-committed three years ahead of its completion,’ added Ms Leong.

Apart from obtaining the necessary approvals, including the approval of CCT’s unitholders, if required, Ms Leong said that the decision to redevelop the site will always be subject to the financial viability of the project, which includes the amount of development premium payable based on the payment of 100 per cent of the enhancement in land value (instead of the standard 70 per cent).

She said: ‘We do not have any indication of the amount of development premium payable right now. However, it is expected to be a major component of the total redevelopment cost of MSCP.’

When the project was first announced in January, CCT said that the total project cost, depending on the development premium, could range from $1 billion to $1.5 billion.

On rising construction costs, Ms Leong said that this has increased by 10-15 per cent since the beginning of the year and that CCTML had also sought quotations from the construction companies.

Ms Leong said it would continue to take the necessary steps to obtain the planning permission (PP) from the Urban Redevelopment Authority, and assist its retail tenants in relocation. It would also ‘continue operating the car park to serve our season and hourly car park users’, she added.

While the potential loss of 704 car parking lots at MSCP was a prickly issue with many of its current uses, CCTML said that the provision of car parking lots was not an issue in getting PP.

Cushman & Wakefield managing director Donald Han said the deferment was ‘excellent news’, not least because occupancy costs, which factor the cost of car parking, would have increased.

He also reckons that the deferment could be linked to MSCP historically being designed to serve the CBD until new lots are provided. However, new restrictions limiting the number of lots in new buildings will have an impact on the number of available lots.

Knight Frank director (research and consultancy) Nicholas Mak believes deferring the project could be a strategic move to see if construction costs and rates for development charges could fall in the future.

But he believes the project will not be deferred for too long. ‘Reit’s have to constantly look for a growth story or it won’t seem interesting to investors.’

Plans to redevelop Market Street Car Park postponed

CCT has decided not to submit design plans for the redevelopment of Market Street Car Park before mid-2009 after considering the significant size of the project, rising construction costs and volatility in the financial markets. The design plans for the iconic Grade A office building was required to obtain Provisional Permission (PP) from the Urban Redevelopment Authority (URA). The Chief Valuer will then conduct assessment of the enhancement in land value based on the design plans and determine the amount of development premium payable. CCT will evaluate financial viability and funding structure for the redevelopment project after the amount of development premium is determined.

CCT has previously estimated the cost to redevelop the site into a Grade A office tower with estimated gross floor area of 850,000sf at between S$1b to S$1.5b. The building was originally expected to be ready by 1H2012. We did not view the development negatively due to:

• We did not factor in any contribution from the redevelopment of Market Street Car Park in our earnings forecast.

• CCT will focus on digesting the acquisition of One George Street. CCT’s asset size would increase to S$6.5m after the acquisition of One George Street is completed. This allows CCT to undertake development projects of up to S$1.4b in size on a 50:50 JV basis. Pursuing the redevelopment of Market Street Car Park at a later stage allows CCT to secure a larger slice of returns from redeveloping the site.

• The project is postponed but not cancelled. The redevelopment potential of Market Street Car Park remains to be exploited.

1Q08: Benefiting from positive rental reversion

CapitaCommercial Trust (CCT) reported gross revenue of S$71.2m in 1Q08, an increase of 22.8% yoy. Notable growth drivers were 6 Battery Road, Robinson Point and Capital Tower, where revenue contributions increased 81.5%, 23.1% and 16.3% yoy respectively. CCT benefited from strong demand for office space from banks and financial institutions and supporting business services such as legal and IT firms. Renewed and new leases committed in 1Q08 were 195.1% over preceding rental rates. CCT was able to sign leases above S$20psf pm during the quarter. Net property income increased 15.6% yoy to S$49.6m while distributable income gained 22.6% yoy to S$35.9m. CCT announced DPU of 2.59 cents for 1Q08, an increase of 22.7% yoy.

Benefiting from positive rental reversion in 2008 and 2009. Rentals for prime office space within Raffles Place and Marina Centre shot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07 (source: CB Richard Ellis). Rentals for prime office space surged a further 6.7% qoq to S$16.00psf pm in 1Q08 as tenants chased after limited pockets of vacant space within the Central Business District. Overall occupancy rate for Grade A and B offices at 96.9% is above the technical full occupancy rate of 95% (Source: Colliers International).

Supply of office space remains constrained in 2008. Only 959,000sf of new office space will come on stream, the majority in fringe suburban locations. According to CB Richard Ellis, rentals for prime office space could average S$17.00psf pm by end-08, an increase of 13.3% in 2008. Supply of 1,275,000sf of office space in 2009 is also lower than projected take-up of 1.6m sf per annum. CCT is well positioned to benefit from positive rental reversion as another 29.4% of its leases for office space are up for renewal in 2008 and 2009.

Call option to acquire One George Street. CCT has obtained a call option to purchase One George Street from CapitaLand for S$1.165b, or S$2,600psf. One George Street is a 99-year leasehold Grade A office building within walking distance from Raffles Place MRT station with a net lettable area (NLA) of 447,999sf. CapitaLand will provide yield protection with minimum net property income of S$49.5m p.a. (yield of 4.25%) for five years from the date of completion of acquisition till 2013. This is equivalent to rental of S$10.50psf pm. CCT’s asset size will expand to S$6.5b if the acquisition is approved and completed. The company has secured committed debt funding and will not require placement of new units. Gearing is estimated to increase from 24% to 40.8% post acquisition of One George Street.

Has refinanced short-term borrowings. CCT has issued S$150m 3-year medium term note with fixed interest rate of 3.05% in Mar 08. This has largely satisfied funding requirements for refinancing short-term borrowings and the acquisition of Wilkie Edge, a mixed development project at Selegie Road. CCT has also launched a S$280m 5-year convertible bond with coupon of 2%, yieldto- maturity of 3.95% and conversion price at S$2.6762.

CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 5.29%, a healthy spread of 2.94% over 10- year Singapore government bond yield at 2.35%. Our target price is S$2.63, assuming the acquisition of One George Street is completed by Jun 08.

CCT Q1 distributable income at $35.9m

DPU of 2.59 cents is 12.1% above forecast

CAPITACOMMERCIAL Trust (CCT) has announced a first-quarter distributable income of $35.9 million, or 12 per cent higher than forecast. Distribution per unit (DPU) for the three months ended March 31 came to 2.59 cents, better than the 2.11 cents a year ago and 12.1 per cent above forecast.

Net property income totalled $49.6 million or 8.8 per cent above forecast. ‘CapitaCommercial Trust achieved higher rental income as Singapore experienced considerable rental growth in the office market over the past 12 months,’ said Richard Hale, chairman of CapitaCommercial Trust Management, which manages the trust. ‘This growth, together with our strategy of pro-active asset and prudent capital management, increased the first-quarter 2008 distribution per unit significantly by 22.7 per cent over the same quarter in 2007.’

Mr Hale said that if the acquisition of 1 George Street at a purchase price of $1.165 billion is approved and completed, CCT’s total asset size will grow to $6.5 billion, ahead of the target of $6 billion by next year.

‘Given Singapore’s still-strong economic fundamentals and continued healthy office leasing demand, we are confident of exceeding the forecast distribution per unit of 10.04 cents to unitholders in 2008,’ he said.

Lynette Leong, chief executive of the manager of the trust, said that there is continuing keen demand by banks and financial institutions for greater space in CCT’s quality buildings. CCT’s portfolio includes Capital Tower, 6 Battery Road, HSBC Building, Starhub Centre, Robinson Point, Bugis Village, Golden Shoe Car Park and Market Street Car Park.

Grade A and prime office rents averaged $18.65 per square foot (psf) per month and $16 psf per month respectively in Q1 2008, representing increases of 8.7 and 6.7 per cent from the preceding quarter.

‘Given the prime quality of CCT’s portfolio, we have signed leases above $20 psf per month in Q1 2008,’ Ms Leong said. ‘Our well-balanced lease expiry profile, together with our pro-active asset management, will enable us to benefit from the tight office market . . . and gain continued rental upside.’