Here’s why CCT isn’t out of the woods yet despite its string of lease renewals

Rental pressure for 2017 leases looms.

Though CapitaLand Commercial Trust (CCT) has locked down renewals for most of its office leases expiring in 2016 forward, increased rental pressure looms for its leases in 2017-2018.

According to a report by UOB Kay Hian, Q2 saw 2016’s expiring office leases slashed to 4% by NLA, with overall positive rental reversions. This leaves a respective 10% and 17% of office leases by NLA due for renewal in 2017 and 2018, with respective average passing rents of $10.77 psf and $10.64 psf.

“We note that these passing rents are above that of CBRE spot Grade-A office rents of S$9.50 psf, with management has acknowledged the likelihood of negative reversions next year,” UOB Kay Hian states.

Meanwhile, fresh contributions from CapitaGreen are expected to tide CCT through. Full contribution from the project is anticipated in Q4, hot on the heels of completion of the acquisition in Q3. Management also estimates DPU accretion of 2.3% based on current occupancy of 94.6%, as CapitaGreen’s Q2 income contribution only reflects 80.4% in rental occupancy with tenant's fitting out.

The REIT manager also retained about $15.5m in tax-exempt income, thanks largely from its 17.7% stake in MQREIT, a Malaysian commercial REIT. UOB Kay Hian notes this could also help CCT skate through the more challenging operating environment.