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OUE C-REIT’s prime Singapore portfolio delivers sustained growth

Bryan Wu
Bryan Wu • 9 min read
OUE C-REIT’s prime Singapore portfolio delivers sustained growth
Han says the prime core locations of OUE C-REIT’s diversified assets mean it benefits from both sectoral upswings and downturns. Photo: Albert Chua/The Edge Singapore
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OUE Commercial REIT’s rebranded Hilton Singapore Orchard fully opened earlier this year, coinciding with the post-pandemic resurgence of international travel. The hotel’s transformation into Hilton’s flagship and largest hotel in Asia Pacific has attracted tourists eager for holidays and business travellers returning to Singapore, a key regional tourism and financial centre.

The hotel’s offerings are complemented by more dining, shopping and lifestyle options at Mandarin Gallery, a high-end mall on Orchard Road situated within four levels of the hotel. The REIT’s sole retail property on the Orchard Road shopping belt is occupied by fashion brands Bimba Y Lola, Michael Kors and luggage line Rimowa as flagship locations, creating a distinct shopping experience.

This premium angle is evident across OUE C-REIT’s well-balanced property portfolio, of which 92% are in prime Singapore locations. Around 50% of its portfolio contributions come from the growth-driving retail and hospitality segments, while the balance comes from the stable office sector.

With an aggregate net lettable area of some 2.2 million sq ft of prime office and retail space across Singapore and Shanghai, as well as 1,643 upper upscale hotel rooms — its total asset size stood at approximately $6 billion as at end-June — the REIT is well-positioned to capture opportunities as the hospitality, retail and office spaces return to post-pandemic normalcy.

CEO Han Khim Siew says the prime core locations of the REIT’s assets mean that it has adopted a “dual strategy” approach to its portfolio, benefiting from both sectoral upswings and downturns. “For one, it provides us with a gamma strategy, which means we benefit from volatility. When times were bad during Covid-19, there was a flight to quality, and tenants moved from lower grade to higher grade buildings, which worked well for us,” he says in an interview with The Edge Singapore.

Now that the pandemic has stabilised and the real estate sector is showing signs of improvement, OUE C-REIT has been able to increase rents more quickly, thanks to its prime properties. “The best-in-class buildings benefited the most and moved the fastest out of the gates,” says Han. “Quality does matter.”

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Reflecting the improved performance of OUE C-REIT’s office and retail properties in Singapore, the commercial segment revenue for the first half of its FY2023 grew 13.3% y-o-y to $93 million while net property income (NPI) increased 16.4% y-o-y to $72.3 million.

After pandemic-related hospitality challenges, Hilton Singapore Orchard’s revamped identity revitalised OUE C-REIT, attracting a fresh, premium clientele. “As part of the rebranding, we can now tap into the Hilton Honors members programme that has over 100 million members, as well as Hilton’s strong global corporate client network,” Han says. “We’ve been able to change the profile of our visitors from large, lower yielding tourist groups to business travellers that now fill up our rooms.”

Retail and hospitality driving growth

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In the first half of FY2023, OUE C-REIT’s hospitality segment has benefited from higher room rates as revenue grew 35.8% y-o-y to $45.8 million while revenue per available room (RevPAR) increased 34.3% y-o-y to $232 on average. Hilton Singapore Orchard’s RevPAR exceeded pre-Covid-19 levels, in part due to its successful rebranding and the management’s focus on driving room rates as part of its yield management strategy, while Crowne Plaza Changi Airport (CPCA) reported a 54.1% y-o-y surge in RevPAR to $207.

The first tower of Hilton Singapore Orchard was opened in February last year with 634 rooms before the remaining 446 rooms were opened at the start of 2023. As part of its new branding, the 1,080-room hotel now boasts an “enlarged and improved” meetings, incentives, conferences and exhibitions (Mice) space catering to hybrid events — the largest along Orchard Road.

OUE C-REIT’s other hotel, the 563-room CPCA, located in another prime tourist catchment at the world-renowned Changi Airport, will soon complete an asset enhancement initiative worth $22 million to “revitalise” its offerings. Announced on Aug 2, the World’s Best Airport Hotel — as recognised for eight consecutive years by travel ranking consultancy Skytrax — will receive enhancements which include the addition of 12 guest rooms, an extensive revamp of the all-day dining restaurant to complement the current F&B offerings at Changi Airport and the creation of new and flexible meeting facilities by optimising and repurposing underutilised spaces creatively to enhance value and drive greater returns.

Says Han: “This AEI is timed to capture the anticipated influx of leisure and business travellers in 2024 and beyond as Singapore’s hospitality sector’s recovery prospects remain positive. We believe these income-generating enhancements will strengthen CPCA’s competitive positioning as a premier hospitality destination in its unique Changi Airport location.”

With the main goal of creating long-term value for unitholders and stakeholders, the CEO expects the newly announced AEI at CPCA to be distribution per unit (DPU) accretive for OUE C-REIT. With the estimated capital expenditure of up to approximately $14 million for OUE C-REIT, the AEI is expected to generate a stabilised return on investment of approximately 10%.

Prime offices deliver stable returns

Similar to the rise in international travel, Singapore’s demand for prime office space has surged, ensuring stable growth for OUE C-REIT. The REIT has four Grade A office properties, which consist of OUE Bayfront, One Raffles Place and the office components of OUE Downtown, all strategically located within Singapore’s central business district (CBD), as well as Lippo Plaza, which is found within the prime commercial district of Huangpu in Shanghai, China.

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Han says that in 2022, the office space in Singapore saw an uptick in interest and demand as multinational companies and family offices deliberated over the various major Asian cities, with many eventually choosing to go with the city-state. Alongside the family offices in Singapore, equivalent to 60% of Asia’s total, he points out that supporting players like accountancy, consultancy, and legal firms have also opened branches in the country to cater to their relocated clients.

An increase in supply is not matching this influx of demand, as the CEO notes that although the Singapore government has created a CBD incentive scheme allowing developers of new buildings 25% more gross floor area than the older office buildings they are replacing, this comes with the caveat that 40% of the new mixed-use development has to be residential. “The net effect is an approximate 25% reduction in office space compared to the old office building,” Han adds.

“This means we will be getting less office space in the CBD over the next six to seven years,” he continues. “With supply being capped and demand remaining fairly strong, this should underpin occupancy and rental rates in Singapore.”

OUE C-REIT’s One Raffles Place footfall has bounced back to 92% of pre-Covid-19 levels. Han equates this statistic to an average of four and a half days that the working crowd is back in the office, while the REIT’s portfolio utilisation rate is similar to the Singapore office utilisation rate, standing at 65% or three and a half days of working in the office. “On average, people are now back in the office four days a week,” he says.

This means that OUE C-REIT’s retail and hospitality assets have also benefited from the hybrid working model many employers have now adopted. “If employees are working from the office three or four days a week, that also means that on days that people are already in the office, they are more willing to stay out a bit longer in the CBD, whether it is going to the gym or catching up with friends over a meal,” says Han.

He adds that the prime locations of the REIT’s offices ensure its properties are well connected via private and public transport, making it easier for employees to get to work. “Being in the CBD essentially means that we are pulling people in,” says Han. “The best-in-class amenities of the area have been a key selling point for our occupiers because recruitment was challenging last year.”

Sustainable financing lends flexibility

This marked dedication to high standards in its portfolio is similarly reflected in the REIT’s commitment to actively optimise the quality of its assets by diligently managing its operational performance. OUE C-REIT has also taken a proactive and innovative approach to strengthening its capital structure, placing it on a robust trajectory for sustained growth.

Last year, in anticipation of the US Federal Reserve’s continued interest rate hikes, the REIT tapped into the bond market in Singapore by issuing $150 million 4.20% fixed rate notes with a 25 basis points step-down trigger to 3.95% when OUE C-REIT obtains an investment grade credit rating, a first in Singapore’s capital markets.

Moving forward on its sustainable financing journey, the REIT obtained the largest-ever unsecured sustainability-linked loan (SLL) amongst S-REITs, totalling $978 million in August 2022 after achieving its first SLL in 2021. With the completion of its third SLL in June 2023, OUE C-REIT’s refinancing risk has been substantially mitigated as there are no refinancing needs until 2025, and the weighted average term of debt stands at three years. In addition, the SLLs feature interest rate reductions linked to sustainability performance targets, which would help cushion interest costs once OUE C-REIT achieves those targets. With sustainable financing making up 69.7% of total debt at the end of June, this is among the highest within S-REITs.

A high proportion of OUE C-REIT’s debt is unsecured due to the SLLs, significantly improving OUE C-REIT’s financial flexibility. Increasing the proportion of unsecured loans is also part of the REIT’s plan to obtain an investment-grade credit rating, increasing access to more diverse and competitive funding sources and leading to potentially lower funding costs as the REIT embarks on its growth plans.

Given its prudent capital management, coupled with the recovery of tourism and the resilience of the Singapore office sector, OUE C-REIT, with its pure-play 92% Singaporean portfolio, could represent an attractive investment opportunity despite global market uncertainty.

“We are fairly insulated from foreign exchange rate risks, of which there is a considerable amount at the moment because the Singdollar has appreciated strongly against most foreign currencies,” says Han. “Singapore continues to be viewed positively as a safe haven by investors, which helps distinguish ourselves as an S-REIT.”

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