2009 Income Locked in, 2010 & 2011 Challenging: 92% of management’s forecast rentals for 2009 have been locked-in and management is now focusing on 2010 and 2011 renewals. While we applaud management’s efforts to shore up rents, we believe market forces of supply and demand will play the dominant role and expect prime rents to fall to S$8.40 and S$6.50 by end 2009 and 2010 from S$9.50psf pm as at 2Q09, putting pressure on reversion from 2H09 onwards.
Occupancy Could Be Better Than Expected: Portfolio occupancy fell 0.5% to 96.2%, with the main decline contributed by One George Street. We believe occupancy could hold up better than expected as tenants realize it is costly and troublesome to relocate. However, we believe that higher occupancy levels will come at the expense of lower rents to retain tenants.
According to management, CCT is starting to see some tenants move back into the CBD area as office rents continue to moderate, which in our view is positive. Refinancing Risks Removed but De-valuation still a concern: With S$823m proceeds from the rights issue, CCT has paid down S$664m in debt and the nearest debt repayment of S$235m is in 2010. With unsecured assets of S$3bn and S$665m unutilized from the S$1bn multicurrency MTN programme – we see little refinancing risk for CCT. However, de-valuation risksstill loom. Latest valuations assume a cap rate of 4.5% and 4.75% for prime and other office assets – a low cap rate in our opinion. Gearing could rise to 40% if asset values fall by a further 25% (assuming a 6.2% NPI yield).
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