SINGAPORE (March 14): OCBC is maintaining its “buy” on Frasers Commercial Trust (FCOT) with $1.39 fair value given its recent share price fall on uncertainties over renewal leases.
Year to date, FCOT’s share price has declined by 0.8%, underperforming the FTSE ST REIT Index and STI which have risen by 4.0% and 9.2% respectively.
In a March 14 report, lead analyst Andy Wong Teck Ching attributes the underperformance to lease renewal uncertainties for tenants, Hewlett-Packard (HP) Singapore and Hewlett-Packard Enterprise Singapore, at its Alexandra Technopark (ATP) property.
The leases will expire in Nov 2017 and Sep/Nov 2017 respectively and both HP entities contributed 17.5% of FCOT’s gross rental income, as at end Dec 2016.
From what OCBC understands, HP has not made a decision on renewing its leases.
But HP is using 2.1 million sf of space in Singapore and its new built-to-suit project at Telok Blangah, which is 100% leased from Mapletree Industrial Trust, only has a total GFA of 824,500 sf.
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“Hence, we believe it is unlikely HP will vacate its entire premises at ATP,” says Wong.
“We conservatively assume only partial renewal by HP, and lower our FY18 occupancy assumption at ATP from 95% to 80%. Our FY18 DPU forecast is consequently cut by 9.0%.”
In 4Q16, Singapore’s Grade B office rents in the CBD core and islandwide declined by 2.1% and 2.0% q-o-q respectively, based on data from CBRE.
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Both represented seven consecutive quarters of decline, but the magnitude of decrease was similar to 3Q16.
“Hence we believe the office market is showing signs of stabilising,” says Wong.
Units of FCOT are trading 1 cent higher at $1.26.
