Office rentals still declining. CapitaCommercial Trust (CCT) has received more enquiries from financial institutions (fund management), oil & gas companies (HQ functions) and professional services (legal and accounting) recently. However, these enquiries have not translated into take-up for office space. Management expects office rents to be on a declining trend till the end of the year, although the magnitude of decline has moderated. According to Colliers, average rents for Grade A office space within Raffles Place has dropped by a severe 29.0% qoq to S$7.45psf. We continue to expect rents for Grade A office space within Raffles Place to slide further to S$6.00psf by end-10, representing a two-third correction from the last peak.
Further write-down on revaluation. Based on transactions for strata office space at Suntec City Office Towers, capital values rebounded 38% in 1H09 from the bottom in Feb 09 and remained stable in Jul and Aug 09. The huge correction in office rents could once again put pressure on capital values. We estimate NAV/share will be reduced from S$1.50 to S$1.14, assuming 6 Battery Road and One George Street are valued at S$1,680psf (current: about S$2,320psf) while HSBC Building, Robinson Point and Capital Tower are valued at S$1,200psf (current: about S$1,520psf). Gearing will correspondingly increase from 30.6% to 37.0%.
Redevelopment of Market Street Car Park postponed indefinitely. New anchor tenant Koufu, a food court operator, has opened for business at Market Street Car Park after completing renovations. Net lettable area has increased as Koufu occupies the whole atrium/courtyard. Planned redevelopment for Market Street Car Park has been postponed indefinitely as the new lease with Koufu will expire at least three years later. The Outline Planning Permission (OPP) for the redevelopment of Market Street Car Park has lapsed. CCT will have to reapply to Urban Redevelopment Authority if it intends to redevelop the property at a later stage.
We believe office rents will continue to be under pressure due to large new supply coming on stream in 2010 and 2011 and competition from business parks outside the Central Business District (CBD).
We have assumed portfolio occupancy tapering off from 94.9% in 2Q09 to 90% by 2Q11 (previous: 88%). Maintain HOLD. Our fair price of S$1.09 is based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%).
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