• OUE Commercial REIT (OUECT SP) is one of Singapore's best-quality commercial REITs, with a well-diversified and high-quality portfolio of assets across office, hospitality, and retail.

• A recent Smartkarma webinar (Smartkarma Corporate Webinar | OUE CREIT: Strength in Portfolio Diversity) with the management revealed a positive outlook for the company's portfolio across the office, retail, and especially hospitality with some well-times asset enhancement initiatives bearing fruit.

• OUE Commercial REIT has strong sustainability credentials, both through its green-certified buildings, and an increasing portion of sustainable finance, with some well-timed recent financing. This Insight is part of the Smartkarma Corporate Webinars series, supported by SGX through the Investor Education Fund.

A Leading Light in Commercial Property

OUE Commercial REIT (OUE-C) is one of Singapore's leading and welldiversified REITs with exposure to office property, retail property, and hospitality. The REIT has six properties in Singapore and one in Shanghai, with total assets of S$6bn. OUE-C's office properties are all in prime core locations in Marina Bay, Raffles Place, and Shenton Way, where the mediumterm supply is limited. The properties include OUE Bayfront, One Raffles Place, and OUE Downtown Office, all of which are in the core CBD. locations.

Significant and Well-located Portfolio

The REIT manages a total net lettable area of 2.2 million sqft plus it owns 1,643 upper upscale hotel rooms. Its retail properties include the Mandarin Gallery, The Hilton Singapore Orchard, and the 563-room Crowne Plaza Changi Airport. These assets are strategically located along Orchard Road and within the Changi Airport vicinity, all of which are well-positioned to benefit from Singapore's position as a key business and leisure destination. The REIT also owns Lippo Plaza in Shanghai, which is a well-located asset with high levels of occupancy.

Effective Growth of Assets

OUE Commercial REIT (OUECT SP) was listed on the SGX in 2014 with two seed assets including OUE Bayfront and Lippo Plaza in Shanghai, with total assets of US$1.7bn. Its first acquisition in 2015 was One Raffles Place, where it has an effective 67.95% stake, increasing the REIT''s assets to S$3.5 billion. In 2018, OUE-C acquired the OUE Downtown Office, taking its assets of S$4.6 billion. In 2019, OUE-C merged with OUE Hospitality Trust by way of a trust scheme of arrangement, taking its assets to S$6.9 billion. This gave OUE-C greater scale and leverage to push forward. In 2020, the REIT rebranded the Mandarin Orchard Singapore to the Hilton Singapore Orchard, which is now Hilton's largest hotel in Asia but this only represents 8.5% of assets and 7% of portfolio revenues.

OUE Ltd (OUE SP) Has a Well-diversified Portfolio of Commercial Assets Mostly in Singapore

Asset Enhancing

In 2021, the REIT undertook an asset recycling exercise and divested a 50% stake in OUE- Bayfront at a 7.3% premium to book value and at a 26.1% premium to its purchase consideration. At this time, OUE-C joined the FTSE EPRA Nareit Global Development Index. It also obtained its first sustainably linked loan with commitments to reduce the environmental impact of OUE REiT's portfolio.

Step Down Finance

OUE Commercial REIT (OUECT SP) issued Singapore's first bond with a coupon step-down feature of US$150 million, with a -25 bp step-down on the coupon if the REIT obtained investment grade status. OUE-C obtained a BBB- rating from S&P in October 2022, which meant the stepdown was triggered saving S$375,000 in interest per annum.

Early Refinancing a Boon

The REIT continues to optimise its debt cost and refinanced over S$978 million with sustainable financing just before rates started to rise, which was 1.26x oversubscribed, with no new financing now required until 2025. This refinancing helped to offset much of the market rise in interest rates. The company has also adopted appropriate hedging strategies and leveraged its investment-grade credit rating.

Boost for Hilton Singapore Orchard

In February 2022, the REIT officially opened the Hilton Singapore Orchard with 1,080 rooms. The company has recently reopened 446 rooms at the refurbished Orchard Wing of the Hilton Singapore Orchard after a 10-month asset enhancement initiative (AEI). The REIT recently obtained a sustainably linked loan of S$430 million, increasing its sustainably linked financing to 69% of the total, the highest amongst the Singapore-listed REITs. OUE-C has also unveiled a S$22 million AEI for the Crowne Plaza Changi, which will be completed by the end of this year. This is well-timed since 2024 is a big year for events and conferences, which is discussed below.

Positive Momentum

OUE Ltd (OUE SP) released a strong set of 9M2023 results with revenues increasing +22.4% YoY to S$214.6 million, with net property income increasing by +25.4% YoY. 91.4% of revenues came from Singapore, with the remainder coming from Shanghai. Regarding the breakdown by segment for 9M2023, 48.5% came from office, 36.2% came from hospitality, and 16.2% from retail.

Leverage in Good Shape

The REIT's average leverage stood at 39.4% at the end of 9M2023, with the average cost of borrowings at 4.2% of borrowings. The average maturity of its debt stood at 2.7 years, with 68.0% on fixed rates, insulating the REIT for interest rate volatility. 69.7% of borrowing is also unsecured helping to reduce its funding cost.

Capitalising on Tourism Recovery

OUE Commercial REIT (OUECT SP) continued to maximise its asset performance by capitalising on the ongoing tourism recovery both through its hospitality and retail assets. From an office perspective, the REIT continued to leverage Singapore's limited Grade A office supply to, wh drive positive rental reversions whilst maintaining high occupancy rates. The REIT also positively managed its rental reversions through early engagement to increase tenant retention and optimise occupancy. It also continued to prudently optimise the management of operating expenditure for the portfolio.

Green Credentials

The REIT also continues to improve environmental performance for its properties to retain its green building certifications. From an ESG perspective, OUE Commercial REIT (OUECT SP) obtained a 3-star rating in the Global Real Estate Sustainability Benchmark (GRESB) assessment. 96% of OUE-C's portfolio is now green-certified, whilst 69% of its borrowings are sustainability-linked. From a people perspective, the company has a 91% of employees gave the company a high employee satisfaction score. 73% of employees are women, underlining its employment diversity, with 89% average tenant satisfaction for its commercial properties.

Prime Locations

OUE Commercial REIT (OUECT SP) has a high-quality portfolio in prime locations. Its committed occupancy in its Singapore office portfolio has rebounded post-COVID and it is currently in line with the overall market, with OUE Bayfront maintaining consistently high occupancy throughout. One Raffles Place and OUE Downtown Office have also consistently maintained occupancies above 90% since pre-COVID. The recent increase in committed occupancy improvements reflects the manager's focus on proactive asset management and strong leasing momentum.

Diversified Tenants

The REIT has a diversified portfolio mix in terms of its tenant mix which has helped to maintain resilience of its revenues through volatile periods. Hospitality is the largest type of tenant, at 36.5% of the total, followed by banking and finance at 14.5%, retail at 9.7%, accountancy & consulting services at 9.4%, manufacturing & distribution at 5.8%, IT media and telecoms at 4.3%, and F&B at 4.3% plus several other sectors.

Health Performance Despite Cautious Markets

OUE Commercial REIT (OUECT SP)'s performance has remained healthy despite cautious market sentiment with committed occupancy remaining high at 95.7%, only declining -0.4% QoQ, with the average passing rent increasing +1.3% QoQ to S$10.35 per sqft and with a rental reversion rate of +18.4% in 3Q2023. The REIT has a WALE of 2.5 years for both GRI and NLA.

Hospitality Front and Centre of the Recovery in Visitor Arrivals

The hospitality segment revenues and net property income for 3Q2023 increased by +67.6% YoY and 73.2% YoY, with the better performance boosted by the Hilton Singapore Orchard operating its full inventory of 1,080 rooms versus 634 rooms the previous year. There was also an ongoing recovery in the hospitality sector with visitor arrivals in Singapore reaching 10.1 million by the end of September and 11.3 million in October, with the expectation that the number could reach 13 million by the end of 2023. This number is still some way from the 2019 high of 19 million visitor arrivals in Singapore.

2024 Is a Big Year for Events

2024 promises to be a busy year in Singapore, with several events including Art Singapore. January is expected to draw in 40,000 visitors, the Singapore Airshow in February should see 24,000 visitors, Trade Fair Singapore should bring in 20,000 visitors, Asia Pac Maritime is expected to bring 14,000 visitors, Rotary Fair with 25,000 expected attendees, ComunicAsia should see 40,000 visitors, and the International Dentists Convention that is expected to see a staggering 80,000 attendees. 1H2024 will also see Taylor Swift, Ed Sheran, and Coldplay further boosting tourism numbers. 2H2024 will also see the benefit of Formula 1. OUE-C is well set up with the large MICE facility in the Orchard area in the Hilton Singapore Orchard, with its largest ballroom able to take 900 guests.

Retail Assets Are Curated

OUE Commercial REIT's retail space in the Mandarin Gallery is well located right opposite the Apple Store on Orchard Road, which helps to increase footfall. The REIT curates the tenants at the Gallery with a good mix of streetwear and some retailers that only chose one or two locations in Singapore include the flagship Rimoh stores, which do extremely well. The key draw is retailers that sell unique products that consumers are very likely to want to touch, feel and try on, drawing customers into the mall. The Mandarin Gallery had 98.7% occupancy as of the end of September 2023, with rental reversions of +31.1% in 3Q2023, signifying the ongoing recovery and the quality of the asset.

Hybrid Working Is Less of a Threat

The threat of hybrid working on the demand for office space has now subsided, with that adjustment having already taken place in 2020-2021. The pendulum has swung the other way, with companies having over-adjusted capacity downward. This has to be reversed given the return to office work for a larger portion if not all of the working week for many office workers. There has also been an increase in co-working spaces, which has created additional demand. There has also been an influx of new demand as companies have relocated from Hong Kong to Singapore, given the experience of COVID-19.

Grade A Rents to Remain Resilient

In 3Q2023, core Grade A CBD Rents increased by by+0.4% QoQ to S$11.85 per sqft per month while the vacancy rate declined to 3.2% with better leasing activity and absorption of shadow space. The delayed completion of a sizable development in CDB until 2024 will support rents and occupancy for the remainder of 2023. Although rental growth is expected to grow at a more modest pace in 2024 of +1.5%-2.0% YoY, the improving economic outlook for 2H2024 plus limited new office completions in CBD over 2024-2026 should continue to support rents in the longer term.

Government Policy Is Supportive of the Office Market

Another key component in Singapore to consider is the Government's involvement in managing the supply of office space in Singapore, with no supply of land for development expected until at least 2030. In the meantime, any new supply will have to come from redeveloping existing buildings, which knocked down and rebuilt must include at least 40% residential plus the fact that a new building would probably take four years to compete. Both these factors impact near-term and longer-term supply.

Rental Reversions for Office Rentals in 2024 Should be Positive

in terms of rental reversions, around one-third of the company's office portfolio comes up for renewal each year, with leases mostly three years with a few five years .2024 renewals will come from contracts set in 2021 when average spot rentals stood at S$10.31 per sq ft. Average Grade A spot rentals currently stand at S$11.85 and may decline next year depending on the outlooks for interest rates and the economy. Even factoring in a mid-to-low single-digit decline in spot rents from current levels, renewals next year should see single-digit growth for Grade A.

Still Significant Upside for Hospitality

For hospitality, there is still a +40% upside until visitor arrivals return to 2019 levels of 19 million annual visitors to Singapore, given that the number for 2023 is likely to finish at around 134 million arrivals. The growth in the supply of new hotel rooms is relatively slow, with new hotel rooms expected to grow by +2.6% CAGR between 2023 and 2025 versus =4.3% annual CAGR between 2014 and 2019. This suggests that we are around 60% of pre-COVID levels in terms of new room supply suggesting that room rates and occupancies should be well supported.

Well-Heeled Play of Singapore Commercial Property

OUE Commercial REIT (OUECT SP) represents one of the best quality commercial REITs in Singapore with a well-appointed portfolio across the office, hospitality, and retail segments, all of which look to have positive prospects. Well-timed refinancing and an increasingly sustainability edge to both assets and financing with an investment-grade credit rating put the REIT in a prime position amongst its peers. Its AEIs for the hospitality segment will take time to materialise but will support a positive outlook for the next two years for the hospitality segment.

Well-heeled Exposure

OUE Commercial REIT is one of the most interesting ways to get exposure to the recovering commercial property market in Singapore through its core exposure to Grade A office, hospitality, and retail, with well-located and predominantly green-certified buildings. It has also successfully switched to deploying sustainably linked finance, further improving its sustainable credentials. Its ongoing AEIs will help to improve returns at its hospitality assets, while there are few M&A opportunities in the market. The valuations look attractive with the REIT trading on 0.46x FY2023E PBV and a dividend yield of 7.1%.