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Broker's take: OCBC downgrades Soilbuild Reit to 'hold'

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OCBC Investment Research on Wednesday downgraded Soilbuild Reit to "hold" with a lowered fair value of S$0.62, citing competition pressures ahead for the real estate investment trust.

OCBC Investment Research on Wednesday downgraded Soilbuild Reit to "hold" with a lowered fair value of S$0.62, citing competition pressures ahead for the real estate investment trust.

Analyst Deborah Ong noted that rental reversions for the Reit came in at -12.6 per cent for new and renewal leases in Q4 2018, and -8.6 per cent in FY2018. She expects West Park BizCentral to continue facing negative rental reversions in 2019, as strata-titled properties around the Tanjong Kling area are completed.

"In addition, as some of the tenants within West Park BizCentral use the space for logistics and freight forwarding, West Park BizCentral faces additional competition in the form of warehousing alternatives elsewhere in Singapore, some of which are now trading bellow a dollar per square foot per month," she said.

While the Reit's Q4 results came in above expectations, this was mainly due to one-off liquidation proceeds of S$3.25 million from Technics Offshore Engineering. Without the one-off, Q4 distribution per unit (DPU) would have fallen 8.1 per cent quarter on quarter and 17.3 per cent year on year to 1.144 Singapore cents.

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For the full year, DPU would have decreased 12.9 per cent year on year to 4.98 Singapore cents, missing OCBC's initial full-year forecast.

"The 8.1 per cent quarter-on-quarter decline in DPU took us by surprise," Ms Ong wrote. She noted that Q4's net property income (NPI) was S$1.5 million higher on a quarter-on-quarter basis, but was offset by greater expenses including increased finance costs and other trust expenses and a full-quarter distribution to perpetual securities holders.

Solaris is expected to be a positive for Soilbuild Reit going forward; OCBC estimates that its NPI improved S$1.4 million year on year in Q4, after it was converted from a master-leased to a multi-tenanted asset.

OCBC also sees rents at Tuas Connection slowly stabilising, with most negative rental reversions expected to moderate in 2019.