Published December 8, 2008

CCT, Suntec, Parkway Reits pick of analysts

Reasons include strong parentage, minimal near-term refinancing risks

By UMA SHANKARI
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TWO research firms - Nomura and CIMB - have issued 'buy' calls on CapitaCommercial Trust (CCT) in recent reports.

Suntec Reit and Parkway Life Reit were also picked as good buys in the local real estate investment trust (reit) market.

In a report last Wednesday, Nomura Research said that office sector reits are its top picks. 'Our valuation diagnosis suggests the market's somewhat morbid assessment is more than pricing in such concerns in the office sector and we retain our 'buy' calls on CapitaCommercial Trust and Suntec Reit,' it said.

Weaker demand is likely to see office rents fall by almost half to a trough in 2011, Nomura predicted. But CCT has already renewed leases due even in FY 2009-2010. This, plus rental support from One George Street until FY 2013 and minimum rent at Raffles City until FY 2011, should provide stability to about half of the rental income stream despite the office downcycle.

Given CCT's strong corporate profile and parentage, Nomura is also confident that debt will be refinanced, though the cost is likely to be significantly higher. Nomura has a target price of $1.14 on CCT, which closed at 62.5 cents last Friday.

For Suntec Reit, Nomura expects office reversions to remain positive in FY 2009-2010 despite the overall weaker market and for Suntec City Mall to hold its own against growing competition.

'With the $700 million CMBS (collateralised mortgage-backed securities) loan not due until next December, near-term refinancing risks are minimal,' Nomura's note concluded. The firm has a target price of 90 cents on Suntec Reit, which ended last Friday at 63.5 cents.

CIMB's top reit picks are CCT and Parkway Life Reit, it said in a report last Friday. 'From the refinancing deals announced in October and November, we conclude that reits with strong sponsors, particularly Government-linked sponsors, low leverage and quality portfolios, are more likely to secure bank loans, which are the preferred refinancing option,' said CIMB analyst Janice Ding.

CCT is sponsored by CapitaLand, which is a Temasek-linked company. CIMB has a target price of $1.17 on CCT.

Parkway Life Reit, on the other hand, was chosen for its stable income stream from Parkway Holdings, the reit's major tenant and operator, which remained profitable throughout the last two recessions in 1998 and 2002. CIMB has a target price of $1.30 on the reit, which closed at 71.5 cents last Friday.