The recent 2Q09 GDP report for Australia revealed that business investment contraction was briefer and much smaller than expected by our economics team and that consumer spending was holding up much better than previously forecast. As a consequence of the better-than-anticipated 2Q09 GDP number, Nomura’s economics team has lifted Australia’s 2009 GDP growth forecast to 1.0% from -0.2%. Nomura’s economists have also adjusted its 2010F growth forecast to 1.9% from 1.8%, while maintaining its 3.0% forecast for 2011F. Key drivers to the revised forecasts are an expected stronger contribution from domestic demand and less support from net exports. With the better economic outlook, Nomura’s economists have revised peak unemployment forecast to 6.8% in 2010F (from 8.1% previously).
While the economic outlook appears to be improving, the 2Q office data highlight a marked contraction in demand in the Australian office market resulting in a broad uplift in office vacancy. According to the Property Council Australia, net demand contracted by 160,284sm, resulting in vacancy rising in the first six months of 2009 to 8.3% from 5.9% as at the end of 2008. Vacancy in Australia’s main CBD market rose to 7.3% by end-June from 4.7% at end-2008. While demand in the respective office markets remained weak, the rising in vacancy was partly prompted by the completion of nearly half a million square metres nationwide.
FCOT in August 2009 raised S$213.9mn via the issuance of 2,252.0 mn new rights units at S$0.095/units. In addition to the issuance of new equity, FCOT has acquired a 99-year leasehold interest in Alexandra Technopark from parent Frasers and Neave for S$342.5mn, funded by way of the issuance of preferred equity. A five-year master lease, as part of the deal, will ensure a net rental of S$22.0mn, equating to a net yield on our numbers of 6.4%. The preferred equity attracts a coupon of 5.5%, equivalent to S$18.8mn per annum. A full conversion of the preferred equity at a conversion price of S$0.177/unit would result in the issuance of further 1,933.0mn units. Following the transaction, the REIT manager estimated that its gearing would fall to 0.465x post the rights issue, falling to 0.385x following the acquisition of Alexander Technopark. On our numbers, we are forecasting end-FY09 gearing to come in at 0.41x vs our previous estimate (pre transaction) of 0.62x. FCOT in its circular indicated that its NAV would fall to S$0.26/unit, following the rights issue from S$0.78/unit based on its 1Q09 results. If the preference shares were fully converted the NAV would fall to S$0.23/unit.
While signs of life are appearing in the Singapore office market, tough market conditions remain in both the Singapore and Australian office markets. That said, we continue to see value in FCOT, with market conditions more than reflected in our asset valuations. Following its recent recapitalisation, we reset our price target to S$0.184/unit (down from S$0.29/unit) to reflect the increased number of shares, as a consequence of the S$213.9mn rights issue and the potential dilutive effects of conversion of preferred equity. Following the rights issue as well as the acquisition of Alexander Technopark on a yield of 6.4%, we raise our distributable income to S$26.2mn for FY09F (from S$22.8mn) and to S$44.6mn for FY10F (from S$18.4mn). While distributable income has been raised, our DPU for FY09F and FY10F are cut to S¢1.8 and S¢1.5, respectively (due to the rights and preferred equity issuance) resulting in a prospective FY09F and FY10F yield of 11.0% and 9.2%, respectively.We retain our BUY recommendation on FCOT.
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