OUE REIT is in the plum position of owning nearly all Singapore-based assets, with just a single building in Huaihai Zhong Road, Shanghai. Its revenue is almost evenly split between office (50.2%) and hospitality and retail (49.8%). This diversified portfolio of high-quality assets has enabled the REIT to provide income resiliency and attractive return.
More than that, timely capital management initiatives during the interest rate cycle have helped OUE
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Given that capital management is the backbone of any REIT, it is no surprise that one of the first things Han Khim Siew did when he joined OUE REIT’s manager as CEO in February 2022 was to strengthen OUE REIT TS0U ’s balance sheet and lock in attractive rates with extended debt tenor to provide stability to distributable income. These measures included issuing Singapore’s first bond with a coupon step-down feature, obtaining the largest sustainability-linked loan (SLL) among Singapore REITs to date in 2022, and completing its third SLL in 2023.
With its assets largely unencumbered, alongside continued improvement in asset performance, the REIT was assigned an investment-grade credit rating from S&P Global in 2023, allowing it to obtain cheaper financing.
To further enhance OUE REIT’s access to more diverse and competitive sources of funding, the REIT successfully increased its proportion of unsecured debt with the completion of a $600 million SLL in May this year.
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All this hard work earned a vote of confidence from the investors. As an example, OUE REIT launched its first investment-grade green notes in June. At an initial price guidance of 4.35%, the offer achieved peak order book in excess of $475 million, 3.2 times oversubscribed based on OUE REIT’s initial target size of S$150 million. Subsequently, the final offer was upsized to S$250 million and pricing was ultimately tightened to 4.10%, 97.3 basis points over the three-year Singapore Overnight Rate Average Overnight Indexed Swap (SORA-OIS) as of the launch date. The issuance garnered a final order book of $425 million (good at reoffer), representing an oversubscription of 1.7 times over the final upsized offer.
“We’ve been monitoring the market and patiently waiting for a favourable window for at least six months,” says Han on the timing of the launch.
According to Han, two key factors came into play. The first was the REIT’s investment-grade credit rating by S&P Global, which enabled it to further tighten the spread, setting a strong precedent for future debt issuance. The investment-grade credit rating also meant that the REIT could tap into a wider pool of institutional investors that only invest in investment-grade papers. These investors often look deeper into the company’s credit metrics compared to private banking investors who usually invest in non-investment-grade bonds focusing more on the bonds’ high yields and returns.
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Singapore issuers were also viewed favourably, as were investment-grade green bonds, which saw increased demand, adds Han.
“What is important to point out is, 74% of the final allocation went towards institutional investors. Among these investors, over 65% are green investors, who either have Green/ ESG funds and green strategy, are signatories of a variety of ESG initiatives, or make public announcements on their sustainability commitments. The support from institutional investors also reflects the REIT’s ability to diversify its source of funding and lower cost of debt,” he adds. “So that allows the sustainable growth of the REIT as well.”
Dual strategy
OUE REIT currently has six properties in Singapore spanning offices, hotels and retail spaces. It also owns Lippo Plaza, a 36-storey Grade-A commercial building with a retail podium, next to Shanghai’s Xintiandi.
“There are two aspects of our portfolio. The first is the REIT’s gamma strategy, which is designed to navigate different stages of the market cycle,” Han explains. “A lot of investors are worried about market volatility, but we want to be able to benefit from it.”
“By having strategically located prime core assets, [our portfolio] is very defensive,” he adds. For instance, the REIT will benefit from the flight-to-quality trend that comes about during times of stress.
This was apparent during Covid-19, where there was preference for quality assets. The REIT’s three Grade-A offices in the CBD were able to hold their occupancy rates because there was demand, notes Han. What’s more, despite the economic uncertainties in first half of 2024, OUE REIT’s Singapore office portfolio occupancy remained high at 95.2%, with a strong rental reversion of 11.7%.
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The second part of OUE REIT’s strategy is a barbell portfolio consisting of commercial and hospitality assets. As at June 30, about 50% of the REIT’s income comes from its commercial offices, which enjoy fairly stable revenues where leases are signed every three years, Han explains.
On the other hand, hotel’s dynamic pricing allows room rates to be adjusted in real time based on demand.
“This means, when times are favourable, we can increase the room rates,” he says. “I do think inflation will be higher for longer. So, hotels provide attractive returns as it is perceived as a natural inflation hedge, because you can adjust rates daily, whereas for offices, your rents may run behind inflation if it keeps running up over an extended period.
“Plus, if inflation is going up, we do need to raise our room rates, because wages are going up, the cost of food is going up, so everything is then raised accordingly. That is a function of inflation, and hotels do benefit from that. Higher utility costs can also be passed to hotel guests easier as well... the impact on room rates is less significant.”
Looking ahead
OUE REIT intends to grow its hospitality portfolio to 40% of its total revenue over the next few years, up from 32.5% as at 1HFY2024 ended June 30.
A part of that will come from the revenue per available room (RevPAR) growth from the REIT’s two hotels — the 1,080-room Hilton Singapore Orchard and the 575-room Crowne Plaza Changi Airport, says Han.
In 1HFY2024, the REIT’s hospitality RevPAR surged by 15.8% y-o-y to $269 thanks to the continued recovery in the hospitality sector. Hilton Singapore Orchard’s RevPAR alone spiked by 18.3% y-o-y to $291 on the back of higher occupancy.
Opportunities from the return of international tourists are also another factor behind the REIT’s decision to grow its hospitality portfolio, Han adds.
“Asia’s middle class is also growing... [and with] this growing [population], we feel hospitality will do well in the next five, 10 years because there will be an increased demand for travel,” says Han. “So, why not position ourselves nicely for the immediate growth, which is improved visitor arrivals. We also want to be there for the medium- and longer-term secular trends.”
Hilton Singapore Orchard, formerly the Mandarin Orchard Singapore, reopened its doors in stages from February 2022 after a $150 million renovation. The property is Hilton Group’s flagship hotel in Singapore and the largest in the Asia Pacific region.
“When we reopened [Hilton’s] 634-room [Mandarin Wing in February 2022], we were able to actually fill up the rooms and push up the room rate quite nicely over March, April [and] May because of the post-pandemic reopening,” says Han.
OUE REIT’s Crowne Plaza Changi Airport also underwent a $22 million asset enhancement initiative (AEI) and announced its completion on Jan 3 this year. The AEI saw the addition of guest rooms as well as a new all-day dining area and meetings, incentives, conferences and exhibitions or MICE spaces.
“Crowne Plaza Changi Airport is a very strategic asset. It was used as a quarantine hotel for aircrew during Covid-19. But after Singapore reopened its [borders] and as travel improves, the hotel has been very well sought after among transit passengers and air crew, and a popular spot for family staycations,” says Han.
OUE REIT also has a right of first refusal for its sponsor’s assets across the commercial, hospitality and retail sectors. Its sponsor, OUE Ltd, was awarded the tender for a lease and development of a new Indigo hotel at Changi Airport’s Terminal 2 in April. The hotel will have 255 rooms and is expected to be completed and fully operational by 2028. It will be the first zero-energy hotel in Singapore.
The REIT is also open to acquisitions in developed markets, particularly in cities such as Sydney, Melbourne, Tokyo, Hong Kong and Singapore, in no particular order.
“If values have corrected and there seems to be good value in properties in these locations, then yes, we can look at acquiring a hotel asset,” says Han.
More importantly, the acquisition must be accretive to the REIT’s earnings and DPU, he emphasised.
New name, new growth opportunities
OUE REIT, which was rebranded from OUE Commercial REIT TS0U , has been operating under its new name since Jan 29. The name change coincided with the REIT’s 10th listing anniversary and better reflects its current focus on growth opportunities within the hospitality, office and retail sectors, as well as commitment to providing “resilient and sustainable” returns through the diversification of its portfolio.
The rebranding came at the right time and “made a lot of sense”, says Han, since the REIT had a sizeable hospitality portfolio.
“[The new name] is all encompassing, and still fits into our new mandate post-merger with OUE Hospitality REIT, which was commercial assets (office and retail), and also hospitality assets,” he adds.
“We like this combination; we are not thinking of going into logistics, industrial [properties] or data centres. This is what we’re happy with.”
