Office Gaining Momentum; Retail Recovering Gradually
CICT is in advanced negotiations for new leases to backfill vacant spaces at Capital
Tower and CapitaSky, which could potentially improve occupancies by 18ppt and 3ppt
respectively to 94% and 95.8%. New supply from IOI Central Boulevard Towers coming
on stream in 4Q23 is likely to be largely pre-committed. Rent reversion for retail could
remain weak due to changes in the tenant mix at some of its retail malls. CICT provides
2023 distribution yield of 5.4%. Maintain BUY. Target price: S$2.50.
WHAT’S NEW
• Office: Back working from the office again. Outlook has brightened with all employees
allowed back to their workplaces since 26 Apr 22. 47% of employees have returned to work
from their offices as of Apr 22. Island-wide net absorption has reversed to positive territory
for three consecutive quarters and was 307,282sf in 1Q22. Leasing demand is driven by
non-bank financial services, technology, pharmaceutical and fast-moving consumer goods
sectors. Vacancy rate for Grade A Core CBD has tightened from the peak of 5.5% in 3Q21
to the current 4.5% in 1Q22. CBRE forecast rents for Grade A Core CBD to recover 6.9% to
S$11.55psf/month in 2022 due to limited new supply.
• Upside from backfilling vacant office space. Occupancy for Singapore office improved
1.9ppt qoq to 92.3% in 1Q22. There is room to further ramp up occupancies at Capital
Tower (76.6%), CapitaGreen (93.6%) and Six Battery Road (88.4%). We understand that
CapitaLand Integrated Commercial Trust (CICT) is in advanced negotiations to finalise a
lease agreement with ByteDance to backfill 120,000sf of office space at Capital Tower
vacated by JPMorgan. If successfully closed, the new tenant would bring occupancy at
Capital Tower back to 94%. Occupancy at newly-acquired CapitaSky (70% stake) is also
expected to improve 2.9ppt to 95.8%. Rent reversion could be flat or slightly positive in 2022. Capital Tower should generate positive rent reversion due to low expiry rent of
S$5.99psf pm, offset by high expiry rent at AST2 (S$11.31psf pm), CapitaGreen
(S$11.33psf pm) and Six Battery Road (S$11.67psf pm).
• New supply pre-committed by technology giants. We understand that Amazon and Meta
Platforms are in advanced negotiations to lease office space at IOI Central Boulevard
Towers, the only new supply within core CBD over the next three years. Amazon could take
up 369,000sf of office space covering 11 floors, representing 29% of the available office
space of 1,258,000sf from IOI Central Boulevard Towers. Amazon is expected to
consolidate its presence at Marina Bay by keeping 90,000sf of office space at CICT’s Asia
Square Tower 2 (AST2) (three floors), which is linked to IOI Central Boulevard Towers by a
second-storey link bridge.
• Retail: Recovery in consumer spending. Safe distancing between individuals is no longer
required, whether indoors or outdoors. Food & Beverage establishments are operating at full
capacity as the cap on group size of 10 persons was lifted since 26 Apr 22. Consumer
spending on Department Stores, Wearing Apparel & Footwear and Cosmetics, Toiletries &
Medical Goods have recovered +17.2%, +25.8% and +25.2% yoy respectively in Mar 22.
Food & Alcohol also grew +19.6% yoy
• Downtown malls to lead recovery. Retail occupancy was stable at 96.6% in 1Q22. Tenant
sales at suburban malls are already 1% above pre-COVID-19 levels, while tenant sales at
downtown malls remain 14% below pre-COVID-19 levels. Management estimated mild
negative rental reversion at 1.3% in 1Q22, based on average incoming rents vs average
outgoing rents (suburban malls: +1.0%, downtown malls: -3.1%). We expect recovery from
downtown malls, such as Bugis Junction, Funan, Plaza Singapura and Raffles City
Singapore (RCS), which benefit more from the return of office crowd and tourists.
• Rent reversion likely to be weak as retailers remain apprehensive. CBRE expects retail
rents to be stable in 1H22 before more meaningful pick-up in 2H22. New supply is limited to
addition and alteration works at existing retail malls outside the central region and there is no
significant mall completion in 2022. Many retailers are adopting a wait-and-see approach
before committing to new leases. Retailers need a sustained period of recovery lasting 12-
15 months before confidence is restored. CICT’s rent reversion could remain weak due to
potential change in tenant mix at some of its retail malls, such as Clark Quay.
STOCK IMPACT
• CICT is working on two asset enhancement initiatives (AEI) as part of its proactive asset
management strategy:
• AEI for RCS. CICT will commence AEI for the three floors of retail space at RCS previously
occupied by Robinsons. It plans to reconfigure 111,000sf of retail space into smaller units for
specialty retail and large format stores. New offerings include Calvin Klein, Acqua di Parma,
Elemis and House of Wei. 50% of the retail space is pre-committed. Management targets
completion by 4Q22.
• AEI for CQ. The JV between CapitaLand (CICT’s sponsor) and City Developments to
redevelop Liang Court will rejuvenate the surrounding area around Clarke Quay (CQ). CICT
plans to enhance CQ by changing the trade mix to complement Liang Court. CQ will be
repositioned to serve the residential population within the vicinity with more tenants that
operate during the day (a departure from the current orientation towards nightlife). Detailed
plans are still being finalised.
• Diversified sources of funding. CICT has an active medium term note programme, which
accounted for 32% of its total borrowings. CICT’s enlarged scale and increased
diversification post-merger with CapitaLand Commercial Trust (CCT) has enabled CICT to
secure a competitive coupon rate from institutional investors.
• Coping with higher interest rates. Aggregate leverage increased 1.9ppt qoq to 39.1% in
1Q22. Average term to maturity is 3.9 years and 85% of its borrowings are on fixed interest
rates. It has stable cost of debt of 2.3%. Management estimated that a 1% increase in
interest rates would result in addition interest expense of S$12.9m per year and reduce DPU
by 0.2 S cents.
EARNINGS REVISION/RISK
• We raised our 2022 and 2023 DPU forecast by 2% due to the improving outlook for the
office portfolio.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price for CICT of S$2.50 is based on Dividend Discount Model
(cost of equity: 6.0%, terminal growth: 1.2%).
SHARE PRICE CATALYST
• Uptrend in the office sector. Steady recovery in shopper traffic and tenant sales due to
easing of social distancing measures.
• Asset enhancement and redevelopment of existing properties.