Gear up for a rough road with this Singapore office REIT

SINGAPORE (Jan 11): Maybank Kim Eng has named CapitaLand Commercial Trust (CCT) as its top “buy” pick in the office sector with an unchanged target price of S$1.81 (RM5.60).

In its 2017 strategy report released last Monday, analyst Derrick Heng highlights CCT’s strong weighted average lease expiry (WALE) of 6.8 years along with just 8% of office leases due for renewal this year, making it “well-positioned to ride through near-term headwinds” in the sector.

Additionally, he thinks incremental contributions from CapitaGreen should drive a three-year distribution per unit (DPU) CAGR of 1.8% well into 2018E.

“Unlike distributions for its office peers that are supported by non-core distributions, CCT’s reflects the underlying fundamentals of its properties. We find valuation attractive with its forward yield of 5.9% offering a generous 3.5ppt spread over SGS 10-year bond yield,” says the analyst.

Maybank is also positive on CCT’s redevelopment of Golden Shoe Car Park into a commercial building, as it believes this allows the REIT to capture a potential recovery in the office market upon completion in 2021.

However, Heng cautions that the project’s feasibility is still limited by the amount of differential premium (DP) payable to change the car park’s use from transport to commercial, which will form the bulk of its redevelopment cost.

“Recall that S$651 million of the S$1.3 billion cost to redevelop its former Market Street Carpark to CapitaGreen relates to DP and other land-related costs,” he reasons.

As at 12:02pm, shares of CCT are trading 1.9% higher at S$1.59. — theedgemarkets.com.sg