Caution raised for new CCT residential site

The 20 Anson Road site will have a rental upside but not as lucrative as it seems, says DBS.

The expectation that average monthly passing rents for the new CapitaCommercial Trust development, which is pegged at S$6.18 psf, will match vicinity rents now hovering at S$8.44 psf is desribed to be "too optimistic."

Final passing rents could be lower than the vicinity average, given the estimated NPI margin of DBS, and the forecast of a more sluggish rental market.

Here's more from DBS:

Acquires asset at 4% NPI yield. CCT is buying 20 Anson Road for S$446.6m or S$2,205psf of net lettable area (NLA), inclusive of a yield stabilisation amount of S$17.1m, to be drawn over the next 3.5 years. Excluding the stabilisation amount, the deal works out to be $2,121psf or NPI yield of 4% based on net property price of S$430m. The building has an NLA of 202,500sf and is currently 100% occupied. The acquisition will be completed by Mar 2012.

Price is fair but expectation on rental upside is too optimistic. The price is in line with recent transacted prices of $2,043-$3,050psf. As most of the leases were sealed during the market trough in 2009/2010, average monthly passing rent for 20 Anson Road is S$6.18psf, which is fairly low compared to the current market rents in the vicinity at S$8.44psf. While there is potential for rental upside, the $8.44psf estimate is fairly optimistic based on our estimated NPI margin of 84% vs the typical c75%. We also expect rental market to weaken on the back of a slower economy.

Financially sound to fund the acquisition. The trust will fund the purchase with cS$100m debt and c. $353m cash. This will increase net gearing from 30.2% to 31%. Including Market St redevelopment and 6 Battery ongoing AEI works, net gearing will be closer to 33.5%. Current cash balance of S$577m is largely from sale of two older assets in 2010.