We hosted a tour of OUE Downtown following the completion of its S$350m AEI. Recall that OUE had acquired the site, formerly known as the DBS Towers 1 and 2 for S$870m in 2010. The AEI exercise repositioned significant parts of the asset, bringing in a 268 room serviced residences branded Oakwood Premier, establishing a 150ksqft NLA retail podium in addition to significant façade refurbishments. Management has subdivided the site in to 4 strata titles, 1 each for the serviced residences, retail podium and 2 separate stratas for each of the office towers.

Highlights from the tour and management meeting as follows:

• The Oakwood Premier branded serviced apartments are spread across studio, 1 bedroom and 2 bedroom units. Room sizes for studio units ranged between 28-30 sqm and 1-br units averaged 53 sqm. Average room rates start at S$350/night for studio units and S$400/night for 1-br units with a minimum stay of 7 nights. Current occupancy for the serviced apartments is c. 50%, with management targeting a stabilized occupancy of 80% by the end of 2018. Management is currently seeking a hotel license for the serviced apartments to increase booking flexibility.

• The 150k sqft retail podium is currently 90% committed and has achieved 85% physical occupancy. Retail rents range from S$5-15psf, with nearly all tenants paying a GTO component ranging from 3-5%. Approximately 28% of NLA is occupied by F&B space, while anchor tenants co-working space provider The Work Project and F&B outlet The Providore take up 20k sqft and 30k sqft respectively. The retail podium also houses 8 gyms.

• Average occupancy at Tower 2 is approximately 95%, while tower 1 occupancy is 76%, as upgrading works continue. Passing rents for the office are c. S$7psf. Management believes that the asset is under-rented due to incentives given during the AEI exercise.

• Management believes that OUE Downtown is still maturing and will need to see one additional rental cycle before the asset is ready for divestment to the its REITs.

• On the US Bank Tower, current occupancy is approximately 72%. Management is currently looking to increase the occupancy rate before bringing the asset to market in 2018, noting sustained interest from pension funds and sovereign wealth funds for core assets.

• On capital redeployment, management remains positive on the Singapore commercial and residential markets. Notably, they belive that the upcoming Beach Road white site is attractive and will consider a bid as a part of a JV. Management is also considering the en-bloc market to restock its land bank, and will target central and fringe sites.

• On its IHC acquisition, management remains positive on the healthcare space, and will look to expand IHC's footprint in Japan via master leases, while also deploying additional assets to its China business. Meanwhile, OUE will look towards alternative uses for its prime site in KLCC.

Rating & Target

• Rating: BUY
• Price target - 12mth (SGD) 3.00

Source: Deutsche Bank Research - 18 Sept 2017