CCT – UOBKH
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.
Office REIT – UOBKH
A new record for office building
Foreign funds continue to grab office buildings. Commerz Real, a subsidiary of Germany-based Commerzbank, has bought 71 Robinson Road for a record S$743.8m or S$3,125psf. The building is owned by a partnership between Lehman Brothers and Kajima Overseas Asia. The site was acquired from Singtel for only S$163.4m in Oct 06 and is being redeveloped into a 15- storey Grade A office building with net lettable area of 238,000sf to be completed by mid-2009. Lehman Brothers and Kajima will provide Commerz Real with coupon of 4.5% during the period of construction.
This is a new record transaction price for office buildings, 7.7% higher than S$2,901psf for Hitachi Tower in Jan 08 and 20.2% higher then S$2,600psf for One George Street in Mar 08. We expect the news to create positive share price momentum for CCT, K-REIT and Suntec REIT.
Leasing momentum remains strong. According to Colliers International, rentals for Grade A prime office space in Raffles Place shot up from S$10.63psf pm in 1Q07 to S$16.64psf pm in 4Q07. Rentals for Raffles Place surged a further 5.3% qoq to S$17.52psf pm in 1Q08 as tenants chased after limited pockets of vacant space. There is strong demand from banks and financial institutions and supporting business services such as law and IT firms. Foreign financial institutions setting up operations in Singapore in 1Q08 includes Sun Hung Kai Fund Management, Man Investments, Swiss Life and MacQuarie Private Bank. Occupancy rate for Grade A office space in has further improved from 98.9% in 4Q07 to 99.1% in 1Q08.
Cambridge – Phillip
CIT reported 1QFY078results with gross revenue of S$17.6 million (+60.8% YoY), net property income of S$15.5 million (+66.0% YoY) and distributable income of S$12.6 million (+71.3% YoY). DPU grew 10.7% from 1.434 cents to 1.588 cents. This represents an annualized DPU of 6.387 cents.
Portfolio growth. CIT completed 2 acquisitions in the 1st quarter, bringing the total number of properties in its portfolio to 42, valued at S$956.4 million. In addition, CIT has signed option agreement for 2 properties worth S$18 miilion and S$75.2 million worth of MOU.
Capital management. CIT has total borrowings of S$358.7 million with S$337 million due for maturity in Feb 2009. It has a further S$131 million in available facility to fund its acquisitions. In Feb, CIT entered into an interest rate swap which provides an allin funding cost of 3.32% until 2013. The current gearing of CIT is 36.9%.
Plans ahead. The Oxley Group took a 20% stake in Cambridge Industrial Trust Management, the manager of CIT in Feb. Oxley is a private investment house with vast experience in Australia and the Asian regions. Oxley’s experience and expertise will be beneficial to CIT regional expansion plan. CIT is currently exploring investment opportunities in Malaysia and China and management reveals that these might crystallise later this year.
Valuation and recommendation. We like CIT for its stable underlying cash flow as well as its management’s execution. CIT managed to lock-in the cost of borrowing at a time when interest rate was at one of the lowest ever. It is also able to keep its expansion on schedule while maintaining a comfortable gearing ratio. With Mitsui and Oxley as its strategic partners, CIT is able to expand regionally without being at a disadvantage compared to some of the bigger players with a parent sponsor. We updated our projections with the recently acquired properties and continue to adopt a conservative approach in not assuming any unannounced acquisitions in our model. We have a DPU forecast of 6.44 cents for FY08, which translates to an attractive distribution yield of 9.33%. Maintain Buy.
Cityspring – SGX
On 14 February 2008, the new Singapore Gas Act came into force, providing a new regulatory framework for the Singapore gas industry.
In conjunction with this, CitySpring Infrastructure Trust is pleased to announce that its wholly-owned subsidiary trust, City Gas Trust (“City Gas”), had been granted the following new licenses by the Energy Market Authority (“EMA”):
(1) a Gas Retailer Licence, authorising City Gas to retail natural gas and to produce and retail town gas in Singapore; and
(2) a Gas Shipper Licence Gas, authorising City Gas to transport gas in Singapore, in each case on the terms and conditions of the respective licences.
The licenses are for a term of 10 years and may be renewed prior to their expiry with EMA’s approval. City Gas does not expect the new licences to have any impact on its business of producing and retailing town gas.
CCT – UOBKH
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.