Frasers Centrepoint Trust offers realistic assessment of office, retail rental trends

DEMAND for prime office spaces in the Central Business District (CBD) has heated up, with Keppel Reit ’s manager revealing in a briefing on Tuesday (Jul 26) that its recent lease signings are in the range of high S$9 to mid S$13 per square foot per month.

Rodney Yeo, the Reit manager’s head of asset management, even mentioned pending lease signings have surpassed S$15 per square foot per month, fostering expectations within the real estate investment trust that the uptrend will continue for the coming quarters.

But Frasers Centrepoint Trust (FCT), which owns 1 office building in Tiong Bahru – the 20-storey Central Plaza – stated that improvements to rent are not seen in city-fringe locations yet.

Speaking at a briefing to analysts and reporters on its business updates for the third quarter ended Jun 30, Pauline Lim, the Reit manager’s head of investment and asset management, said the leasing environment “remains challenging”.

“We do see improvements in rents in the prime CBD office space. That was driven by both demand and supply… but it hasn’t really cascaded to the CBD fringe locations as yet.”

An anchor tenant had vacated 3 floors at Central Plaza, and the Reit manager is now looking at subdividing 1 of the vacated floors, as it works to close negotiations for leasing out the other 2 floors, Lim added.

FCT, which has a portfolio comprising predominantly of suburban retail malls, on Tuesday reported a slight dip in retail portfolio committed occupancy for the third quarter to 97.1 per cent, from 97.8 per cent in the previous quarter. 

The drop was largely attributed to Century Square, where an anchor tenant had pre-terminated, causing the mall’s committed occupancy to fall 10.4 per cent to 83 per cent, from 93.4 per cent.

Lim on Wednesday confirmed that the anchor tenant is Filmgarde, but said “not all is lost” as she revealed the Reit manager is in talks with 2 cinema operators that are considering to take over the space.

“We are in final discussions with 1 or 2 of the operators. It is currently in documentation phase, which is why it is not reflected as a commitment. But once the lease is signed, hopefully by next quarter, you will see Century Square occupancy recovering to above 90 per cent,” she said.

FCT had stated in April that there is headroom for rental growth as it kept its portfolio occupancy cost at a “healthy and sustainable” 16.2 per cent for the first half of 2022 ended Mar 31, down from a height of 19.2 per cent in the 2020 financial year.

Occupancy cost refers to the ratio of gross rental, including turnover rent, paid by the tenants to the tenants’ sales turnover.

Asked what it would consider an optimal occupancy cost for the next 6 to 18 months, Lim said “anything up to the high teens” will be a sustainable level for its suburban retail portfolio.

While the current rate suggests there is headroom for rental increase, Lim said any moves to optimise returns for the Reit would have to be a “balancing act”. 

“You want your retailers to be sustainable as well. It is a symbiotic kind of relationship between the landlord and the retail tenant,” she stressed, although she acknowledged an opportunity to “organically raise the rents” in view of the current occupancy cost.

She added: “The fact that it is at the 16-17 per cent mark, there is some buffer, in that because it is an indicator that they are still trading really healthy levels.”

In May, MSCI ESG upgraded FCT’s environmental, social and governance (ESG) ratings to “A”, up a notch from “BBB”.

Referencing MSCI ESG Research’s report, OCBC Investment Research said in a company update that FCT’s improved rating was driven by improved corporate governance practices, such as enhanced disclosures regarding the Reit’s executive pay practices.

On Wednesday, Chen Fung Leng, its vice-president for investor relations, highlighted other key efforts that could have moved the needle include improvements to emission disclosures and board gender diversity.

“We have made several improvements to our disclosures… It’s more of a comprehensive overview of how we have made progress in ESG, rather than just any singular attribute,” he said.