What Investors Should Know About CapitaLand Commercial Trust’s Five-Step Value Creation Cycle

CapitaLand Commercial Trust (SGX: C61U) is one of the 30 components of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI). It has a market capitalisation of S$4.55 billion and is one of the largest real estate investment trusts in the market.

The Office real estate sector is the main component of the REIT’s income; it accounted for 68% of CapitaLand’s gross rental income in the first-half of 2016. The Retail sector makes up 19% and the Hotels & Convention Centre sector takes up the remaining 13%.

Strong portfolio  

CapitaLand Commercial Trust’s latest earnings (for the second-quarter of 2016) had two statistics which can give investors some insight into the quality of its portfolio.

First, the REIT posted a 97.2% portfolio occupancy rate as at 30 June 2016, which is 2.1 percentage points higher than the occupancy rate of 95.1% in Singapore’s core central business district. Second, it has managed to increase its average monthly office rent for at least 15 straight quarters in a row, from S$7.53 per square feet in the third-quarter of 2012 to S$8.98 per square feet.

Five-step value creation cycle

One possible contributor to CapitaLand Commercial Trust’s ability to do both is its five-step value creation cycle shown below:

Capitaland commercial trust cycle
Source: CapitaLand Commercial Trust’s earnings presentation

The first step of the cycle is to keep growing its portfolio. Currently, it has 10 office buildings in its portfolio and the latest addition is CapitaGreen, a premium office tower that was completed in 2014.

CapitaLand Commercial Trust has a 40% interest in CapitaGreen and is in the process of acquiring the remaining 60% stake; the acquisition is expected to be completed in the third-quarter this year.

Next, the REIT will go about growing its properties’ rents and occupancy levels. CapitaLand Commercial Trust keeps a diversified list of tenants in terms of the economic sectors they are in.

The REIT’s tenants belong to 11 sectors in all. Banking, Insurance and Financial Services tenants accounted for the lion’s share of the REIT’s rent at 31% in the second-quarter of 2016. In addition, the top 10 tenants only accounted for 40% of CapitaLand Commercial Trust’s gross monthly rental income.

In step three of the cycle, the REIT enhances its assets periodically.

This is followed by step four and five, in which CapitaLand Commercial Trust will sell its properties at the right value and recycle the funds, respectively. . The REIT had sold three assets in 2010 and 2011 and the funds were recycled for the development of CapitaGreen.

A Foolish conclusion

It remains to be seen if CapitaLand Commercial Trust can keep its value creation cycle humming along in the future. There is a glut of new supply of office space in Singapore coming online this year and this is expected to lead to a short-term increase in the market vacancy rate.

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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 Ong Kai Kiat does not own shares in any companies mentioned.