Frasers Commercial Trust upgraded to Add by CGC-CIMB

Alexandra Technopark. Source: Frasers PropertyAlexandra Technopark. Source: Frasers Property

CGS-CIMB upgraded Frasers Commercial Trust to Add from Hold after the trust announced it entered a lease agreement with Google Asia Pacific.

Under the lease terms, Google will take up around 344,100 square feet of space at Alexandra Technopark (ATP), or around 33.3 percent of the property’s current net lettable area. That increased the property’s committed occupancy to 93.7 percent.

CGS-CIMB raised its fiscal 2020-21 distribution per unit (DPU) forecasts by 4.3 percent to 7.5 percent on the increased contribution from the ATP property. That boosted its target price to S$1.64 from S$1.50, the brokerage said in a note Wednesday.

The brokerage noted Frasers Commercial Trust is trading at an estimated 2019 dividend yield of 6.1 percent, the higher end of similar office REITs.

“FCOT continues to be in talks with other prospective tenants for the remaining vacant space at ATP, with improved rental pricing power, in our view,” CGS-CIMB said. “This transaction highlights the robust office leasing market, given the low new incoming supply in 2019 and 2020.”

Other analysts were less upbeat about the impact of Google’s tenancy in the near term.

“Although the announcement is a positive development, the reality is that ATP has been 40 percent vacant since the end of December 2018 and will probably remain so until the first quarter of 2020 when Google starts its lease,” Daiwa said in a note Wednesday.

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Daiwa said it expected Google’s presence would lift ATP’s overall image and potentially attract more higher-paying tenants for the rest of the vacant space. But it added there was still some leasing risk at ATP as Microsoft, which Daiwa estimated is occupying 77,000 square feet, is set to vacate in January.

The Japanese investment bank raised its fiscal 2019-2021 DPU forecasts by 1 percent to 3 percent, and increased its target price to S$1.52 from S$1.47. But it kept a Hold call, pointing to limited growth drivers ahead.

Separately, DBS said it was sticking with a Buy call and what it said was a street-high target price of S$1.70. DBS cited the trust’s strong balance sheet with just 29.1 percent gearing, leverage to an upturn in Singapore office rents and an attractive 6.1 percent yield.

DBS added that with Google’s tenancy, there was a “high likelihood” Frasers Commercial Trust would have “clean yield,” without including capital distributions from fiscal 2021.

Frasers Commercial Trust units were up 1.20 percent at S$1.68 by the midday break.

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