CapitaCommercial Trust (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.44

Fair Value: S$1.63

Permission granted to demolish Market Street Car Park

Approval granted for MSCP demolition. CapitaCommercial Trust (CCT) has announced on 16 Jun that it has been granted permission to demolish Market Street Car Park (MSCP) to make way for its new ultra-modern Grade A office tower. The carpark, including its food court and all its shops, will be closed on June 30 and eventually torn down. The new tower is expected to be completed before end 2014.

MSCP redevelopment. Recall that CCT was granted the Outline Planning Permission (OOP) by URA for the redevelopment of MSCP in Jan 2008. However, the project was aborted in Jan 2009 amid the Financial Crisis due to uncertain outlook, tight credit conditions and high development cost and significant size of the undertaking. The OOP was thus allowed to lapse. Subsequently, CCT rekindled redevelopment plans for MSCP and obtained provisional permission in Nov 2010. It will be jointly developing MSCP with its sponsor CapitaLand, with a 40% stake in the JV and capital commitment of S$560m. This constitutes 9.3% of its total assets as of 31 Mar, which is below the stipulated development limit of 10%. CCT will commit S$335m in 2011, and the rest via internal cash resources and debt, keeping pro forma gearing below 31%. The new office tower has a GFA of 887,000 sqft and height of 245m. It will have a towering presence around the area and is likely to be the fifth tallest building in Singapore after OUB Centre (280m), Republic Plaza (280m), UOB Plaza One (280m) and Capital Tower (254m). We have factored in contributions from MSCP starting Dec 2014, with a stabilised NPI yield-on-cost of 6.9% and a modest starting rent of S$14 psf/month. This compares favourably with CCT existing NPI yield in FY10, which is 5.46% according to our estimates.

Reiterate BUY. We are overall positive on the MSCP redevelopment but remain wary that its land lease is only 59 years following the 2014 completion. There is potentially an additional supply of about 1m sqft of commercial space on the reserved list at Marina View (near Asia Square Tower 1 & 2), which was recently announced in the 2H11 GLS programme, with its estimated launched date1 in Oct 2011. We forecast for CCT to continue to experience negative rent reversions in 2011, but this should change in 2012. With its near 100% occupancy and active leasing strategy, CCT stands in a good stead to reap the office rental uptrend for its existing properties, at least in the short to medium term. Reiterate BUY with an unchanged RNAV-derived fair value of S$1.63.