Here's OUE Commercial REIT's biggest threat to earnings

42% of leases from two office spaces are expiring.

As OUE Commercial REITS (OUECT)'s proactive forward renewals have reduced the number of leases expiring in FY16, the greatest earnings risk for the company is in FY17, warns DBS Group Research.

According to the research house, there are approximately 16% of leases by net lettable area (NLA) at OUE Bayfront and 26% at One Raffles Place that are up for renewal in FY17.

The risk of negative rental reversions arises as rents for these leases were signed during the better times in FY14/15, it explained.

"The potential magnitude of falling rents is still uncertain as it is unclear how aggressive the management of the new office buildings will be in discounting rental rates," said DBS Group Research.

The research house estimates OUE Bayfront expiring rents are close to $12.00psf/mth vs. current Grade A market rents of S$9.30.

However, it notes that this is partially mitigated by the ability for OUECT to draw down on its income support.

"Furthermore, with OUECT paying 20% of its management fees in cash this year, management has an extra lever to increase the proportion of fees paid in units back to 100% to soften any potential decline in earnings," it said.

DBS Group Research expects additional income from Lippo Plaza following the healthy rental reversions achieved over the past year.