SINGAPORE (July 2): OCBC Investment Research is reiterating its “buy” call on Frasers Commercial Trust (FCOT) while lowering its fair value estimate by a cent to $1.53 after incorporating more conservative assumptions for near-term DPU projections.

While the research house notes an encouraging upward trend in spot rents, it highlights the near-term DPU’s dependence on support drawn from the distribution of capital gains arising from FCOT’s previous disposal of hotel development rights for China Square Central.

OCBC has therefore reduced its FY18-19F DPU forecasts by 2.2%-2.9% despite the belief that the trust’s current FY18F dividend yield of 7% could compress further, given its significantly lower forward yield of about 5.5% registered at the start of the last rental recovery cycle in 1H13.

In a Monday report, lead analyst Joseph Ng notes there is now greater bargaining power for asking rents at Grade A central business district (CBD) properties on the back of more favourable supply-demand dynamics, and says investors should not discount the positive spill-over effect to Grade B assets.

Citing data from Colliers, Ng says the q-o-q average gross effective rents at Grab B premises over 1Q18 has been particularly encouraging, since about 43.3% of China Square Central’s leases by gross rental, excluding the 18 Cross Street retail podium, will be expiring in FY19.

In his view, this would give FCOT a timely opportunity to ride the Singapore CBD Grade B tailwinds.

“We also note that 1Q18 CBD Grade B vacancy registered a marginal increase of 0.2ppt QoQ to 6.8%, which appears to indicate a tapering of the flight-to-efficiency trend, typically characterised by tenant relocations to newer buildings within the Grade A space,” says the analyst.  

“Broad economic trends look encouraging too, as the Ministry of Trade and Industry has announced that Singapore’s GDP grew 4.4% in 1Q18, beating the 4.3% advance estimate. Furthermore, Singapore’s 2018 economic growth forecast range has been revised from 1.5% - 3.5% to 2.5% - 3.5%, on the back of a slightly improved external demand outlook,” he adds.

See: Singapore GDP growth this year seen unchanged at 3.2%: MAS quarterly survey of economists

As at 3:50pm, units of FCOT are trading flat at $1.38, implying a FY18F and FY19F dividend yield of 7%.