CapitaLand Integrated Commercial Trust: Business Update in Line; Sydney Office Remains Challenging

We retained our fair value estimate of SGD 2.32 per unit for CapitaLand Integrated Commercial Trust C38U, or CICT, after the in-line third-quarter 2023 business update. The trust’s cumulative nine months’ revenue and net property income grew 9.8% and 6.8% year on year, respectively, to SGD 1,166 million and SGD 827 million. This made up 75% and 74% of our full-year estimates, respectively. The slight miss on net property income is due to cost inflation pressure on its operating expense, and management expects net property income margin to improve as it focuses on cost management in the coming months. Following the recent selloff of CICT’s units, we think the trust is currently undervalued and trades at an attractive 2024 dividend yield of 6.5%.

For its office portfolio, the trust continues to improve its office portfolio occupancy rate to 96.4% for the September quarter from 95.4% in the previous quarter. The improvement is largely driven by its Singapore portfolio occupancy that rose 1.4 percentage points, quarter-on-quarter to 98.0% as Capital Tower, CapitaGreen, and Six Battery Road hit occupancy rates of 97.4%, 97.1% and 97.9%, respectively. Positives aside, the office market in Sydney remains challenging, with vacancy rates hitting 14.5% and 20.8%, respectively, for Sydney and North Sydney Central Business District, according to Jones Lang LaSalle. This is reflected in CICT’s Australian office occupancy rate that declined 1.1 percentage points, quarter on quarter, to 87.7%. We expect the Sydney office market to remain lackluster for CICT in 2024 as new offices continue to be completed and added to the supply. We anticipate a recovery from 2025 onward, once the excess supply is absorbed.