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Can CapitaLand Commercial Trust Grow Its Distributions in the Future?

CapitaLand Commercial Trust (SGX: C61U), one of Singapore’s largest office real estate investment trusts (REITs), started 2019 with a bang as first-quarter distributable income and distribution per unit increased by 8.0% and 3.8% respectively. The turnaround in office rents in Singapore’s central business district drove the year-on-year improvement.

But beyond the solid headline numbers, there were positive trends that bode well for the future.

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Positive rental reversions

Rental reversions are the difference between the rent of new leases signed and expiring leases. A positive rental reversion means that the REIT has signed on higher rents with tenants.

In the first quarter of 2019, CapitaLand Commercial Trust signed positive rental reversions at most of its properties. The table below shows the average expiring rents compared to committed rents signed this quarter:

Source: CapitaLand Commercial Trust Earnings Presentation

Most notably, Asia Square Tower 2, Six Battery Road and CapitaGreen saw the highest rental reversions rates.

There has also been a clear upward trend of rising office rents in Singapore. The red line on the chart below shows average rental gross rent per month for the REIT’s office portfolios:

Source: CapitaLand Commercial Trust Earnings Presentation

Comparatively low expiring rent

The positive rental reversion also looks likely to continue as expiring rents in the rest of 2019 and 2020 are lower than 2019 first quarter market rates.

The average rent of leases expiring for the rest of 2019 and 2020 is S$10.44 and S$9.60 respectively. This compares favourably to Grade A office market rents of S$11.15 per square foot in the first quarter of 2019.

Average annual new supply comparatively lower

Finally, the average annual net supply of office space in Singapore’s central area is expected to be lower than the last 10 years.

Source: CapitaLand Commercial Trust Earnings Presentation

Average annual supply from 2019 to 2023 is forecasted at around 0.9 million square feet, lower than the last two five-year periods.

The Foolish bottom line

Office rents are seeing a strong rebound from the trough in 2017. Grade A office market rent is up 3.2% from the previous quarter and 14.9% from the fourth quarter of 2017. The rebound in market rents has been a key reason why CapitaLand Commercial Trust has managed to deliver such strong year-on-year growth.

The growth seems to be just the tip of the iceberg. Low expiring rents, upward office rent trend and comparatively low new central office supply could continue to provide significant tailwinds for Singapore’s largest office REIT.

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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 recommends CapitaLand Commercial Trust. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any REITs mentioned.