About a Reit - CCT and the Office Sector

Recent Price Movement
After hitting a high above 1.2 in December 2009 (52 week high of 1.23 on 08 Dec 2009), the share price of CCT has went down along with the broader market in January and February 2010. After it has XD on 27 Jan 2010, the share price has started falling from 1.12 to below 1.10. There was much volatility, with the share price hitting and rebounding twice from the 1.01 region. The rebound last week was quite specular, with the share price touching a high of 1.12. However, at the end of the week it has gone down again, closing at 1.08.

Latest from the Earnings Report
There are some significant changes or plans revealed during its latest earnings report:

• The NAV per unit has dropped rather significantly from 1.49 to 1.37. This is due to another 5.4% decrease in the fair value of the Trust’s investment properties compared to its last valuation on 22 May 2009.
• The sale of Robinson Point for S$203.25 million. This is 11.4% above the property’s valuation as at 31 December 2009 and 69.7% higher than its appraised value of S$119.8 million in 2004 when it was acquired by the Trust. Robinson Point was one of the initial properties injected by its Sponsor Capitaland when it was listed.
• Plan to redevelop Starhub Centre from a Commercial to a mix Commercial and Residential property. There has not been much details about this as it is still seeking approval from the authorities. According to an analyst report, CCT may co-develop with another property developer, and may keep the commercial part of the redeveloped property while selling the residential part, or it may sell the whole property. But it was only announced this week that the development charge for residential properties will be increased, while that of commercial properties will be decreased. This may have an impact on this plan.

Latest news about the Office Sector
Some extracts about the Office Sector from The Business Times (23 Feb 2010):

• PRIME office rents continued to soften going into 2010 and could slip another 2-3 per cent this quarter, says Cushman & Wakefield.
• The vacancy rate across prime office space improved slightly to 6.9 per cent from 7.4 per cent in Q4.
• Cushman & Wakefield research director Ang Choon Beng expects new commercial developments to have a better year ahead, compared with existing ones. On the other hand, rents of existing office developments may continue slipping until the end of the year.
• According to reports from various consultancies, Grade A office rents in Singapore dropped most significantly in Asia-Pacific in 2009 by more than 40 per cent year-on-year. This has raised the country’s cost competitiveness compared with other cities such as Hong Kong and Tokyo.

Latest news about REITs in General
Announced during Budget 2010, concessions on income tax, stamp duty and GST for REITs will be extended till March 31, 2015. This is significant for the REITs as these concessions were initially to be expired by Feb 17, 2010. This announcement has helped to lift the uncertainties, and is also a continuing show of support for REITs by the government.

Undervalue or still risky?
Among the REITs sectors, the office REITs are still laggard compared to sectors like retail, hospitality and healthcare. Hospitality REITs like CDL H-Trust have staged a significant run up, and this has started way before the recent report in significant turn around and increase in tourists arrival. In fact, when CDL H-Trust started to run up from around 0.70 to above 1.00 last year, there was still no significant upward jump in tourists arrival figures yet though the decline in arrivals has slowed. At that time, H1N1 was still a significant threat to the sector. The office REITs seems to be in a similar situation now. To date the rents are still decreasing, but at a slower pace. The oversupply of office space is the significant threat now. Some analysts are still recommending to avoid the office REITs, and the recent volatility has shown there is still much uncertainties in the sector. However, it is not possible to catch the exact bottom, and at some point in time we will need to access whether we want to take some risks in order to maximize the returns. One news of particular importance above is that the rents have dropped to levels which made us more competitive than Hong Kong and Tokyo, and we will have to see how significant this will contribute to the reversal of our office sector.