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3 Reasons For Investors To Be Optimistic About CapitaLand Commercial Trust

CapitaLand Commercial Trust (SGX: C61U) is Singapore’s largest commercial real estate investment trust by market capitalisation. Its portfolio consists of 10 commercial properties located in Singapore’s central area. Some of the prominent properties include Twenty Anson, Capital Tower, and the recently acquired Asia Square Tower 2.

In the fourth quarter of 2017, the REIT posted some worrying results, including a fall in gross rental income and distributions per unit, and negative rental reversions. However, beneath these headline numbers, there are some interesting developments that could potentially boost future distributions from CapitaLand Commercial Trust.

Contributions from Asia Square Tower 2

Late last year, CapitaLand Commercial Trust finally completed its much-anticipated acquisition of Asia Square Tower 2. The property is a premium Grade A commercial building that is located at the heart of the Marina Bay area in Singapore.

The acquisition was funded through a mix of debt, divestment proceeds from the sales of Wilkie Edge and 50% of One George Street, and a rights issue. Asia Square Tower 2 is a higher yielding asset (3.6%, compared to 3.2% for Wilkie Edge and 3.4% for One George Street) that could lift the distributable income and distribution per unit of CapitaLand Commercial Trust. The first contribution from Asia Square Tower 2 will only come in during the first quarter of 2018.

Furthermore, when CapitaLand Commercial Trust took over Asia Square Tower 2, it only had a committed occupancy rate of 88.7%. In the two months since the acquisition, the REIT has managed to increase the occupancy rate to more than 90%, which will further enhance the yield on the new investment.

Singapore commercial property market upcycle

The pipeline for future office supply in the Central Business District of Singapore is expected to moderate after 2017. Market researcher CBRE Group has said that economic indicators suggest that prior fears of a supply overhang have been misplaced. This is also illustrated by the fact that most new office developments have in fact been able to attract tenants.

CapitaLand Commercial Trust, with its portfolio of Grade A office buildings, is extremely well-placed to take advantage of the improving macroeconomic conditions in Singapore.

Beneficial portfolio lease expiry profile

Finally, I believe that CapitaLand Commercial Trust is well positioned to take advantage of any rise in rental rates because most of its leases are expiring at the time when rental rates are expected to pick up.


Source: CapitaLand Commercial Trust 2017 fourth quarter results presentation

The chart above shows the lease expiry profile of CapitaLand Commercial Trust. As you can see, leases for 24% of its total office space and 6% of its retail space are expiring in 2019. As the property upcycle is expected to be in full swing by then, CapitaLand Commercial Trust will be in a commanding position to negotiate higher rentals when the contracts expire.

The Foolish conclusion

Despite the near-term challenges that CapitaLand Commercial Trust faced in 2017, I believe that it has recycled its capital wisely to acquire Asia Square Tower 2, a newer and higher yielding asset that can benefit shareholders in the long-term. Furthermore, with the commercial market’s likely upswing in the near future, we can start to see positive rental reversions.

At the same time, it is also important to note that with the latest acquisition, CapitaLand Commercial Trust has stretched its gearing ratio to 37% from 32%. The gearing ratio, though still within the regulatory limit of 45%, is near the higher end. Unitholders and investors should continue to monitor the debt profile of the REIT, together with the other aspects of its business, when making an investment decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Commercial Trust. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.