SINGAPORE (June 30): The acquisition of a major Australian property is set to boost DPU growth at Frasers Commercial Trust (FCOT), says DBS Group Research in a report out today.

The purchase of a commercial property in Melbourne known as 257 Collins Street will raise the REIT’s net profit income from its Australian properties to 48% from 40% previously.

The new property generally has long tenancies with a weighted average lease to expiry (WALE) of 6 years and in-built rental escalation clauses of 3.75% - 4% per annum.

As a result, DBS expects 257 Collins Street to be DPU accretive from FY2016, to add about 1.6 percentage points to the overall distribution.

With the acquisition of 257 Collins Street, FCOT’s overall WALE for its portfolio will also increase from 3.5 to 3.9 years, underpinned by long leases for its Australian properties which typically have annual rental escalations of 3-4%.

In Singapore, the expiry of a master lease at Alexandra Technopark (ATP) since Aug 2014, will provide an income boost of some 60% in FY2015 from the property’s previous contribution.

That is because the REIT will be able to enjoy the full underlying income contribution from the property, after the expiry of the master lease and also, benefit from rental reversions as leases with low rentals locked in by the now-expired master lease are renewed at higher rates.

The REIT will also pare down its debt from its $44.3 million proceeds from the sale of a hotel development site at China Square Central in Singapore.

“We maintain our buy call and raise our discounted cash flow-based target price to $1.79. At its current price, FCOT offers investors a dividend yield of around 6.6%-6.8% over FY2015-2016, which is highest amongst office-focused S-REITs,” says DBS.

Frasers Commercial Trust is trading flat at $1.52 with 625,000 shares changing hands.