A firm that provides rental income support for a light industrial building owned by Viva Industrial Trust has gone into liquidation.
The plight of facilities manager Jackson International means Viva loses a guarantee that would have protected it from any drop in rental income at Jackson Square complex in Toa Payoh until November 2019.
The guarantee was from November 2014 when Viva bought Jackson Square from Jackson International.
Under the sale's terms, Jackson International would top up Viva's income whenever the rent from Jackson Square fell below the level it was at when the deal was closed.
Last year, Jackson International topped up $1.56 million. In 2015, it was $2.65 million, so the loss of that rental guarantee creates risks.
But Viva said that the issue should not have a material impact on its financials or distributions for the year ended Dec 31, 2017.
It pointed to a bank guarantee of about $3.87 million that Jackson had set aside for it in 2014. This functions like an escrow account, allowing Viva to tap this amount.
But that is assuming that Jackson Square's operating expenses do not increase significantly above $2 million a year, and that no tenants other than units of Jackson International default on their leases.
Jackson International earned an upkeep fee of $2 million a year in return for bearing all property operating expenses for Jackson Square.
Three Jackson International subsidiaries occupy 24 per cent of the net lettable area of Jackson Square.
Jackson International's subsidiaries may be affected too, said RHB analyst Vijay Natarajan.
Viva also acknowledged on Sunday that the bank guarantee is not enough to cover the rental support amount after this year, without renewing existing leases and securing new ones at comparable rates.
This is not the first negative news for Viva this year. Earlier, it warned that American oil services company McDermott Asia Pacific would not renew its lease at Jackson Square when it expired in April.
Other oil services heavyweights like Technip, Subsea 7 and Saipem have also relocated their South-east Asia headquarters from Singapore to Kuala Lumpur to cut costs.
McDermott had accounted for 31 per cent of gross floor area and 3.7 per cent of Viva's monthly rental income. Foxconn has since taken up 26 per cent of the vacated space, although the rest remains empty.
OCBC analyst Deborah Ong has put her "buy" rating on Viva under review, pending further details.
She wrote: "We projected $2.4 million and $0.9 million in rental support for Jackson Square in 2018 and 2019. We expect the impact on VIT to be minimal barring drastic changes in our occupancy assumptions but would like to revisit our assumptions."
But Mr Natarajan said Jackson Square's troubles are not representative of the whole industrial sector: "There has been some pressure on industrial rents since 2015, but things have been better since this year. Last year was a bad year for industrial businesses, but this year, we are seeing a slight pick-up."
Viva units closed one cent or 1.23 per cent down to 80.5 cents yesterday.
