CapitaCommercial Trust (CCT) prides itself as Singapore’s first commercial real estate investment trust (REIT) when it went public in 2004. Growing to a market capitalisation of more than $3 billion today, CCT readily takes the top spot of the commercial REIT podium, enjoying the uphill ride alongside Singapore’s booming economy.

Braving Weak Demand
However, every industry has a break from its heyday. Such is the case for CCT, which suffered a 7.8% year-on-year decline in its FY11 gross revenue to $361.2 million impacted by the lack of income contribution after the sales of Robinson Point and Starhub Centre in 2010 and the ongoing redevelopment of Market Street Car Park last year. The loss in its top line was further compounded by the weak rental demand within the commercial space caused by the global economic slowdown.

In the final quarter of 2011, CCT’s distribution per unit (DPU) fell by 1% year-on-year to 1.92 cents, totaling FY11’s DPU to 7.52 cents, which represents a 4% drop from the previous year’s DPU of 7.83 cents. A three-year DPU outlook of CCT and its competitors is illustrated in Table 1.

Maintaining Resilience
It is without a doubt that 2012 holds an uncertain outlook for Singapore’s office market. Already the city-state’s Grade A office market had succumbed to the rapidly changing market conditions in the last quarter of 2011. On a quarter-on-quarter basis, the said segment rent dipped 0.5% while average office occupancy rate in the core Central Business District (CBD) fell 1.1 percentage points to 91.2%.

Considering that the Singapore economy is expected to slow down this year from 2011 GDP growth of 4.8%, office rental levels are projected to further soften down the road. Although the office sector remained CCT’s main gross rental income contributor (64% in FY11), launching into panic mode will be premature. A closer look at CCT’s latest full-year results revealed that office leases which are due for renewal this year account for less than 8% of the trust’s aggregate gross rental income. As such, CCT is to a large extent immune to such downward rental reversion.

Another noteworthy point is the weighted average lease term to expiry of CCT’s ten largest tenants. As at 31 December 2011, the indicator stood at 4.5 years, providing further foundation to CCT’s portfolio. What is more, its lease renewal with The Hongkong and Shanghai Banking Corporation, the fifth biggest client in terms of floor area, will commence in April 2012 at double the current rent.

Complementing the aforesaid points, the firm’s capability of keeping its buildings utilised further augments the stability of CCT’s portfolio. For the previous eight years, including the dreaded Global Financial Crisis period, committed occupancy levels have been in excess of 94%. More encouragingly, CCT’s portfolio occupancy rate is in a healthier outlook at 95.8% as at 31 December 2011, compared to the office market average occupancy rate of 91.2% for core central business district.

Rewards In Sight
Pivotal to CCT’s management approach is the strategic asset enhancement initiatives carried out at its properties. The latest phase of upgraded space at Six Battery Road attracted pre-commitment level of 100%. Part of the $92 million improvements that started in November 2010, the upgrading will see the installation of green features that seeks to achieve 25% savings in energy consumption. Not only does this continuous effort by CCT offer value-for-money office accommodation to its tenants, it also reinforces the firm’s commitment to sustainability.

Not resting on its laurels, the joint venture (JV) with CapitaLand and Mitsubishi Estate Asia (MEA) to redevelop Market Street Car Park into a Grade A office tower marks an important partnership as well as the addition of an iconic landmark in the CBD. MEA had previously collaborated with CapitaLand in projects in Singapore, Japan and Vietnam. Under the agreement, CCT, which holds a 40% interest in the JV, has been granted a call option to purchase the remaining stakes from the other two parties (which is CCT’s intention). In addition to adding strength to CCT’s suite of Grade A office buildings in the CBD area, the redevelopment will translate to recurring returns for CCT unitholders in the long run.

CCT also erased any funding concerns for the year ahead, having already secured more than sufficient borrowings. The successful issuance of its $200 million multicurrency medium term note programme and $450 million raised through various bank facilities came in ahead of its debt maturities amounting to $570 million in March 2012. The project funding for the abovementioned redevelopment is in place as well.

Valuation-Wise
Following the valuation assessment by CB Richard Ellis, CCT’s portfolio (excluding Market Street Car Park which is currently under construction) was revalued at $5,729.8 million as at 31 December 2011. Prior to that, CCT’s portfolio stood at $5,597 million. Net asset value per unit, excluding distributable income to unitholders, stood at $1.57 on 31 December 2011, a 6.8% improvement from previous year’s $1.47.

Trading near 31% discount to its net asset value as of 30 January, CCT has been backed by ‘Buy’ ratings from DBS Vickers and OCBC Research. DBS Vickers justified its call, citing strong balance sheet equipped with healthy cash reserves plus the added bonus of growing income from its non-office components. Meanwhile, OCBC liked its quality portfolio and strong execution from the management. Though both houses did point out the risk of negative rental reversion, CCT seems well-placed to weather the headwinds while positioning itself to capitalise on rate recovery for the years ahead.