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Broker's take: Nomura maintains 'buy' on CapitaLand shares, downgrades CCT, Suntec Reit
NOMURA in a report released on Tuesday reiterated its "buy" rating on shares of CapitaLand and "neutral" rating on shares of Keppel Real Estate Investment Trust (Keppel Reit), while downgrading its ratings on shares of CapitaCommercial Trust (CCT) and Suntec Reit from "neutral" to "reduce".
This, said Nomura, is driven by the fact that office Reits have mostly outperformed the Singapore market over the past 12 months and are now trading close to their historical -1SD (one standard deviation) yield of 4.9 per cent.
"We believe the market's complacency on the office Reits could be tested by five potential disappointments in the next 12 months," noted Nomura analyst Min Chow Sai in the report.
For Keppel Reit, CCT and Suntec Reit, Mr Sai said that they could be impacted by vacancies in FY2016, on news of tenants whose leases are expiring in FY2016 - mostly those in the banking and financial services sectors - giving back space.
For CCT, he cautioned that CapitaGreen's overall effective passing rent could be below targeted levels of S$12-14 psf pm, and warned of lower-than-expected yield accretion from CCT's potential purchase of the remaining 60 per cent of CapitaGreen and lower-than-expected return from the potential Golden Shoe Car Park redevelopment by CCT.
For Suntec Reit, this could be affected by lower-than-expected returns on Suntec City Mall's asset-enhancement initiative, said Mr Sai.
For investors who want to retain some exposure to CCT or the Singapore office market, Nomura said that CapitaLand offers a better risk-reward proposition at its current valuations.
"Our estimates suggest CapitaLand's current share price implies a discount of 34 per cent in the valuation of its CCT stake to CCT's current unit price. The discount is in fact almost the widest over the past five years ... the potential sale of the 50 per cent stake in CapitaGreen to CCT could raise CapitaLand's FY 2015 earnings per share by 9 per cent, on our numbers," the report added.