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%.
