Shares & Derivatives
CapitaCommercial Trust @ 96 cts (REIT / Singapore)
By DanielXX  •  December 26, 2008
CapitaCommercial TrustMain issues
  1. Rents set to fall
  2. Interest expense set to rise
  3. Relative yield valuation is not attractive
And finally I resume my Hotstocksnot coverage. It has been a turbulent year and I have been so absorbed, enthralled and traumatised by the stock market that I preferred to spend time on my own stockpicking rather than highlighting hotstocksnots. Besides, valuations had plunged and it was getting difficult to find overvalued stocks. CapitaCommercial Trust (CCT) had dived together with the general market, especially with the REIT segment, since the middle of 2008, hitting as low as 60 cents in early December. It didn't help that it was axed from the MSCI Singapore index in November, which further added to the selling pressure. However, in recent days, it has rallied strongly by over 50% to 96 cents on improved sentiment over property given lower interest rates. It is my view that this is not sustainable and the stock has become a hotstocknot, although it is substantially off its 2007 highs of >$3. I will address my viewpoint along three main issues: revenue, costs (the difference will of course be earnings), and valuation. The expected drop in demand for office space as a result of the financial crisis is probably known to all. That is the reason why CCT dived so sharply the last few months. But let's try to quantify the likely impact on the rents of CCT's properties, and hence revenue, in order to judge whether at the reduced price of 96 cents CCT might be a bargain. Of CCT's portfolio, four properties provide the main revenue stream: 60% Raffles City Trust (30% of total gross rental), 6 Battery Road (24%), 1 George Street (17%), Capital Tower (11%); together they contribute >80% of CCT's gross rental revenue. The last three are office-dominated properties located in the CBD, with Raffles City being the exception (15% office/40% retail/40% hotel & convention). In particular, 6 Battery Road and 1 George Street are prime CBD office towers with peers commanding the highest rentals of $17-20/mth psf; this segment is also the one that has risen the fastest over the last few years. Capital Tower and Raffles City Tower (the office segment) occupy the second-tier, with peers commanding about $11/mth psf. Note that these estimates were obtained in Aug 2008; that's right, before all the mess really started. Three things are worth noting that will have significant impact on future rents at these properties. Firstly, 35% of CCT's gross rental is derived directly from banking, insurance and financial services customers, while other segments likely to be badly affected (hospitality, property services, fashion retail) could range from 25-35%; effectively two-thirds of CCT's customers will be hit badly by the looming global recession (though of course, they might not terminate leases). Secondly, in CCT's core niche: Grade A downtown core office space, there is looming supply overhang come 2010 onwards: as at May 2008, Singapore had 6.7M sqft of Grade A office space; a walk along Shenton Way will make it clear that this supply is poised to surge, with newbuildings at various stages of completion obvious from Robinson Road to Raffles Place to of course, Marina Bay. For the last one alone, the Marina Bay Financial Centre alone is poised to add 3M sqft when both phases are completed by 2012. Property consultants had expected office rents to soften in 2010 even before the financial crisis, but the looming demand-supply dynamics look positively bleak now. Thirdly, and the scariest of all, median Category 1 (ie. prime) office rentals according to URA figures have tripled from $4.5/mth psf in 4Q04 to $13.50/mth psf in 3Q08, and it is fair to say that 3Q08 was near the peak in terms of Singapore prime office rentals. If rates were to even half from the peak, CCT yields would be disastrous. Read more...
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By DanielXX
DanielXX operates a series of popular stock blogs through which he channels his passion for stock investing. He has been sharing his experiences and views on the Singapore stock market for the past year on these blogs, and is best known for his HotStocksNot site where he makes regular calls against certain hot stocks on the Singapore market. DanielXX considers himself a medium-term investor and focuses on fundamental analysis in his stock-picking approach
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