Outlook for Frasers Commercial Trust dim amidst uncertainties in HP lease renewal

HP lease contracts expire next year.

RHB sees limited upside ahead for Frasers Commercial Trust with no clarity on Hewlett Packard (HP) leases yet amidst overall challenging office market conditions.

Discussions on lease renewals with HP are still ongoing. HP is the key tenant in Alexandra Technopark and its leases expire in two phases – one set in Sep 2017 (5.5% of gross income) and the next (~12% of gross income) in Nov 2017.

RHB noted that while estimated rentals currently paid by HP (at a high SG$3psf) are still below the average passing rental rate of SG$4.20psf, backfilling the entire office space in a short span of time would be challenging in the current market.

Management alluded that it could undertake potential asset enhancement initiatives (AEIs) to better reposition the building.

Frasers Commercial Trust reported positive rental reversions in FY16 but RHB warned of headwinds ahead.

"With the commodities sector rebounding, management is seeing a pick-up in Australian property (Perth) leasing enquiries. In Singapore, we expect the leasing market to remain challenging amidst weak demand and huge office supply," it said.

Frasers Commercial Trust has about 21% and 27% of leases due for renewal (as a percentage of gross income) in 2017 and 2018 respectively.

Despite the challenges, Frasers Commercial Trust’s overall portfolio rent reversions remained positive, at +6.6% for FY16 (Sep).

During 4QFY16, all its office properties had positive rental reversions (3.7-9.5%), except for Central Park (Perth) where the occupancy rate dipped to 80.2% and saw a negative rental reversion of -4.2%.