3 Interesting Slides CapitaLand Commercial Trust’s Investors Should See

CapitaLand Commercial Trust  (SGX: C61U) is one of the largest commercial real estate investment trusts (REITs) in Singapore by market capitalization.

It has a portfolio of 10 properties. This includes buildings such as Capital TowerSix Battery Road, Raffles City Singapore, and CapitaGreen. The REIT also has a 17.7% stake in Quill Capita Trust in Malaysia.

The REIT reported its fiscal second-quarter earnings last week. As part of the report, the REIT also prepared a deck of slides for a presentation on the results. Here’re three that investors should take note of.

A spike in office supply

For Singapore’s office rental market, the biggest story in 2016 could be the abnormal spike in the supply of new office space. This is summarised in the slide below (note the light-blue bars):

2016-07-20 CapitaLand Commercial Trust Office Supply
Source: CapitaLand Commercial Trust’s earnings presentation

The average annual net supply of office space between 2011 and 2015 was 0.7 million square feet (sqft).

From the slide above, we can see that 4.1 million sqft of office space is expected to enter the market in 2016. This is over four times the annual average from 2011 to 2015.

The silver lining is that there is limited net supply expected between 2017 and 2020. In fact, if we average out the net supply from 2016 to 2020, we arrive at an annual net supply of 1.1 million sqft. The average estimated new supply of 1.1 million sqft looks like a manageable figure, but will likely still take time to be absorbed by market demand.

Rental rates could be under pressure

In the interim, rental rates could come under pressure.

2016-07-20 CapitaLand Commercial Trust Grade A Rental
Source: CapitaLand Commercial Trust’s earnings presentation

According to CBRE, the monthly Grade A office market rent has declined from its previous post-financial crisis peak of $11.40 per sqft to $9.50 per sqft in the second-quarter of 2016. The increase in supply, coupled with tepid demand, could add pressure on rental rates.

Holding the fort

CapitaLand Commercial Trust has been responding to the challenges. The slide below shows two actions that the REIT has taken:

2016-07-20 CapitaLand Commercial Trust Action
Source: CapitaLand Commercial Trust’s earnings presentation

The first involves keeping the level of lease expiries low in the next two years. From the above, you can see that CapitaLand Commercial Trust has around 14% of its monthly gross rental income expiring in 2016 and 2017.

The second is through increasing income through acquisitions. Here, CapitaLand Commercial Trust has obtained approval to acquire the remaining 60% stake in CapitaGreen that it does not yet own. The REIT expects the acquisition to be DPU-accretive, meaning it helps improve its DPU.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.