CapitaLand Commercial Trust’s Europe foray gets mixed reviews

Euro coinsPhoto by Leslie Shaffer

CapitaLand Commercial Trust’s first acquisition outside of Singapore, a commercial property in Frankfurt, Germany, has gotten mixed reviews.

Last week, the REIT manager said it acquired a 94.9 percent stake in the property, known as Gallileo, for an agreed property value of 356.0 million euros, or around S$569.6 million, for 100 percent of the property. CapitaLand will hold the remaining 5.1 percent stake in the property in Frankfurt’s central business district. The REIT raised gross proceeds of around S$217.9 million from a private placement of 130 million new units to help fund the deal.

Analysts’ views on the deal were mixed.

CGS-CIMB was positive, upgrading the REIT to Add from Hold, pointing to recent unit price weakness, and nudging up its target price to S$1.94 from S$1.93.

“This will give CCT exposure to the robust German market with strong supply/demand fundamentals and low funding costs. Post purchase, CCT’s occupancy and income visibility will be strengthened,” it said in a note on Thursday.

Daiwa, however, was far less enthusiastic.

“Although we see a valid case for CCT to venture overseas and we suppose Frankfurt is as good a landing point as any, we believe it is also indisputable that any foreign expansion would dilute CCT’s exposure to the likely Singapore-office recovery and slightly diminish its inherent attraction as a pure-Singapore office play,” Daiwa said in a note on Thursday.

While it raised its target price to S$1.45 from S$1.43 on the deal, it kept a Sell call.

“[We] do not expect the Gallileo deal, while technically DPU-accretive, to significantly improve CCT’s tepid DPU-growth outlook,” it said. DPU stands for distribution per unit.

Some described the move as more of a necessary, but not terribly exciting step.

“We believe overseas expansion is necessary for growth as domestic investment opportunities are increasingly limited,” Maybank KimEng said in a note on Thursday.

It raised its price target to S$1.82 from S$1.80, but stuck with a Hold call, pointing to a “flat DPU profile” and “fair” valuations.

RHB was a bit more positive on the move, upgrading the REIT to Neutral from Sell and raising its target price to S$1.65 from S$1.63.

“Investors’ reactions may be mixed, as the acquisition comes at a time when Singapore’s office market is recovering,” RHB said in a note on Friday. It noted that dividend yields were now close to “fair levels”  at 5-5.1 percent for 2018-19 after the unit price’s recent decline.

The unit ended Friday down 0.58 percent at S$1.71, down from levels close to S$2.00 at the start of the year.