CapitaCommercial Trust (CCT) - Negative outlook on Singapore office

Potential equity raising: We believe CCT will come to the market for equity within the next six months as asset write downs hit the balance sheet. We believe gearing will need to be addressed via equity issuance in order for CCT to secure future financing commitments. As CCT is trading at a large discount to NAV, potential capital raisings will be highly dilutive to valuations and future distributions.

Negative outlook on Singapore office: We continue to see office as the asset class with the greatest downside risk to capital values and rentals. With expectations of demand contraction and massive supply coming onstream, we now expect rentals to decline faster than previously expected and revise our forecast Grade-A office rents to fall to S$8 psf pm, S$5 psf pm and S$4 psf pm in 2009, 2010 and 2011 respectively. About 75% of CCT’s portfolio is exposed to the Singapore office market, with leases representing 14% of its gross income up for renewal in 2009.

Geared up on peak capital values: Our biggest concern for the office REITs is potential asset value write-downs and the implications for gearing. Assuming a 30% asset write down, CCT’s NAV will halve and gearing will increase to 53% from 37%. In addition, CCT has S$1.0bn of debt due for refinancing by 2010.

Better-than-expected renewal rates: CCT’s portfolio is under-rented versus market rents. If the company is able to secure better-than-expected renewal rates, earnings may beat our expectations.

Improvement in global economic outlook: If we see a turnaround in the global economic outlook, demand for office space may pick up and relieve the additional pressure on office rentals and capital values.

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