Frasers Logistics and Commercial Trust: Cap Rate Expansion To Pressure Year-End Valuation

Frasers Logistics & Commercial Trust’s, or FLCT’s, third-quarter fiscal 2023 (ending September) business update was generally in line with our expectations. Management expects cap rates to shift up by 50 basis points or more in the upcoming fiscal year-end property valuation exercise, which would place downward pressure on valuations. That said, management thinks this could be partly offset by the strong market rental growth for logistics properties in Australia and, to a lesser extent, Europe. We expect limited impact on the trust’s logistics portfolio valuation even as cap rates are expanding, but we anticipate its commercial portfolio to see a small decline in valuation. We factor in 50 basis points of yield expansion in our exit cap rate assumption for both its commercial portfolio (up from 25 basis points previously), and logistics portfolio (from no cap rate expansion). This is offset by a higher rental growth assumption for its Australian and Europe logistics portfolio. Consequently, we reduce our fair value estimate to SGD 1.19 from SGD 1.24 after the model update. We think the units are fairly valued at the current price. We forecast fiscal 2023 distribution yield of 5.7% (based on the last closing price of SGD 1.24), and this should be underpinned by FLCT’s healthy balance sheet and logistics exposure, which benefits from robust underlying demand coming from the strong secular tailwinds of e-commerce.