OFFICE SPACE AND stocks are once again in the limelight, following the sale of a one-third stake of Marina Bay Financial Centre Phase 1 to Suntec REIT by Cheung Kong Holdings at a price of $2,400 psf. Today, Kim Eng Research has an update on Overseas Union Enterprise, the property and hotel company that is now controlled by the Lippo Group owned by Indonesia’s Riady family. In the past two years, OUE has been steadily raising its office asset. It now owns One Raffles Place, 50 Collyer Quay, DBS Towers 1 and 2, 100% of Mandarin Orchard, 30% of Marina Mandarin, two Meritus Hotels in China and Mandarin Gallery, a retail mall.

The company recently completed the acquisition of DBS Towers 1 and 2 for $870.5 million, taking its commercial property portfolio to $3.5 billion in value. In a recent report, Standard Chartered Bank reckons that a fairer value for DBS Towers is $1,325 million based on market price of $1,400-1,956 psf for Grade B office buildings based on recent transactions.

 

On Oct 4, City Developments announced it sold its Grade B office asset The Corporate Office for $215 million or $1,956 psf to Oxley Holdings. Stanchart calculated that OUE’s revalued net asset value (RNAV) is $3,748 million. About 50% of this comprises office space, higher than Keppel Land’s 33%.

 

To fund the purchase, OUE secured a $450 million term loan and a $300 million bond issue arranged by Stanchart. Following the acquisition of DBS Towers, Kim Eng estimates that OUE will have exposure to about 3 million sq ft of office space in Singapore. “Nearly one-third of this space is international Grade A office space from 50 Collyer Quay and One Raffles Place Tower 2 both of which are still under construction. This could be a pipeline for a future REIT,” Kim Eng says.

 

DBS Bank will be relocating to Marina Bay Financial Centre Phase 2 when it is completed in 2012. Analysts are expecting rising rentals for DBS Towers. “We expect signing rents to rise from $5 psf pm currently to $8 psf pm in 2013,” says Stanchart. However, DBS’ relocation may also provide OUE with the opportunity to redevelop DBS Towers 1 and 2, Stanchart reckons.

 

In the short term, OUE management hopes to reposition the five-storey podium as a retail mall to cater to the growing residential population in the Shenton Way area. There is scope to increase the NLA (net lettable area) by over 100,000 sq ft through asset enhancements, as the present NLA of 883,000 sq ft is only 71% of the GFA (gross floor area) of 1.24 million sq ft, Stanchart says. Most modern office buildings have NLAs at 80% GFA.

 

If DBS Towers is to be redeveloped into residential units, Stanchart estimates a reasonable valuation for the property would be $1,325 billion or $1,500 psf. This would also imply that the developer could sell the residential units at $2,150 psf, with a net profit margin of 18%, according to Stanchart’s calculations.

 

Riady has articulated that OUE hopes to balance its development profits with recurring income from its investment properties. Currently, its only residential project is the 462-unit 99-year leasehold project called Twin Peaks. Of the 70 units launched in September, 28 units have been sold at an average selling price of $2,870 psf.

 

Lippo Group placed out 21% of shares between June and October, raising the free float to 32.9%. A five-for-one share split was also completed in June to improve the stock’s liquidity. Stanchart has an RNAV of $3.82 per OUE share. OUE closed at $3.26 today.

 

UOB reported 3Q10 net profit of $688 million, up 37.5% y-o-y and 14.3% q-o-q. This is higher than consensus expectations of $591 million. OSK-DMG had expected net profit of $630 million. Earnings growth was largely driven by “other operating income”, which almost tripled y-o-y and rose more than five times q-o-q.

 

In a statement, UOB said that income growth was due to “higher fee and commission income and improved trading and investment income”. Net interest income contracted to $883 million, unchanged q-o-q but down 4.5% y-o-y while net interest margins fell to 2.07%, down 7bps q-o-q and 32bps y-o-y. Just this week, CIMB Research switched its preference to UOB, from Oversea-Chinese Banking Corporation. OSK-DMG retains its Buy recommendation.

 

With quarterly momentum breaking down after a negative divergence with the STI, and a similar formation by 21-day RSI, the market is probably ready for a good correction. Support/breakdown is at 3,120 and this looks likely to be breached. More meaningful support appears at 3,000.