The Singapore-listed developers share a common thread of experiencing valuation declines in foreign markets. Still, UOL Group appears to be the least affected. With its $22.2 billion asset size, 86% is in Singapore, 3% is in Australia, 1% is in Malaysia, and 5% is in China and the UK.
UOL’s financials are likely to be among the most robust. In FY2023 ended December 2023, operating profit before fair value gains and losses fell by 24% y-o-y to $475.1 million. Fair value gains of $20.2 million on investment properties were significantly lower than FY2022’s $268.2 million, as gains in Singapore were offset by losses in the UK and Australia. The sale of ParkRoyal Kitchener netted UOL $442.3 million, which added to net profit.
Although UOL announced a special dividend of 5 cents along with its first and final dividend of 15 cents, the payout ratio was 24%. “We are approaching things with a bit more caution and adopting more prudent principles. After attending our 1HFY2023 results, some of you concluded that it might be in the best interests of UOL to apply some of the gains, if not the bulk of proceeds from Kitchener, to pare down our loans. [Our cost of debt of] 3.6% to 3.7% is relatively expensive compared to some of the asset yields we can potentially obtain in acquisitions in some parts of the world,” says Kwa Bing Seng, the outgoing CFO.
That is not to say that UOL is not investing in Singapore. In July, UOL and its subsidiary Singapore Land Group U06 (SingLand) acquired a 5 ha site in a joint venture with CapitaLand, which group CEO Liam Wee Sin describes as having MRT connectivity and is an “integrated development which is sought after in the suburban OCR area” of Tampines. The land cost of $1.206 billion translates into a $885 psf per plot ratio.
“Mature estates have a high catchment of buyers. It’ll deliver 1,194 units, a sizeable project with MRT connectivity, a community club, a hawker centre, and almost the largest integrated development in Singapore. We’ll likely launch it by the end of 2024,” Liam adds.
In February, UOL — in an 80:20 joint venture with SingLand — was awarded a residential site on Orchard Boulevard for $428.3 million or $1,617 psf ppr. Plans are afoot to develop it into a high-rise luxury development of at least 36 storeys.
Active AEI programme
UOL has committed capital expenditure for its investment properties. Singapore Land Tower, held by SingLand, is approaching the end of its asset enhancement initiative (AEI) programme. Meanwhile, demolition at Clifford Centre, owned by SingLand, has recently concluded and is to be redeveloped. A substantial AEI is taking place on 333 North Bridge Road. UOL is building a new standalone seven-storey building, 333 Odeon, as an extension to Odeon Towers, now renamed 331 Odeon. West Mall in Bukit Batok is also undergoing an AEI.
Investment income is an important part of UOL’s business as it is the largest contributor at 49% to an operating profit of $684 million, followed by property development at 28%, hotel operations at 9% and others. In FY2022, the lumpy property development segment was a large contributor, but projects such as Clavon, AMO Residence and Avenue South Residences were largely sold.
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Based on geographic contributors by adjusted ebitda excluding the sale of ParkRoyal Kitchener and non-cash adjustments on investment properties, Singapore contributed around 91%.
For now, UOL is likely to remain local. “AEI opportunities will be our mainstay for our existing portfolio, and we will embark on active reconstitution,” Liam says.
SingLand is considering a significant portion of its active reconstitution for Marina Square, having obtained Provisional Permission from the URA in September 2023 for partial redevelopment. “The Project, which is in its preliminary stages, is part of SingLand’s long-term portfolio management strategy that seeks to unlock value from its portfolio of assets,” SingLand had said.
“This is a very complex project with 9ha of land. The authorities want [us] to have some live-in component. I’ve given out a bit of the flavour of things, a perspective of what you can roughly guess what URA is motivated by. As we’ve experienced in Faber House, there must be a motivation for them to give us an enhanced plot ratio,” Liam says. Faber House is an Orchard Road property being redeveloped.
The three hotels in Marina Square, Pan-Pacific, ParkRoyal Marina Collection and Mandarin Oriental will stay “as is”. Liam says the redevelopment will likely have a serviced residence component. Analysts have indicated that the mall will be the largest part and the office a more modest percentage. “There is some affinity to service apartments, and we will be reconfiguring the retail. We are working with multiple agencies.”
Occupancy and rentals
For Liam, asset management and AEI are key to keeping office and retail occupancy high and relevant to tenants. “Our office portfolio continues to see positive rental reversions, and Singapore still stands out as a safe haven,” he says, adding that sentiment improved in the second half. A gradual decline in shadow space in Singapore helped UOL’s office portfolio remain resilient. UOL’s committed occupancy in Singapore at the end of December is 91.8%, up 1.8 percentage points since the end of June.
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Committed occupancies at the end of December at 110 High Holborn and 120 Holborn Island in London and 72 Christie Street Sydney were 85.1% and 100% (leased to MasterCard), respectively.
Liam says UOL’s Singapore retail assets experienced “strong rental reversions and high occupancy” as tourism picked up, coupled with below-average new supply. UOL’s retail properties had committed occupancy of 99.4%. “We see strong leasing demand in prime retail space,” he adds. “Office rental will face challenges because of short-term drivers and supply. For retail, we expect retail rents to maintain their trajectory with tourism arrivals and lack of supply.”
As to whether UOL is likely to pursue an active strategy to narrow the discount between its share price ($6.07) and its net asset value of $13.03, CFO Kwa says UOL has been able to divest assets at a premium to book value. “We are looking seriously as to whether certain assets have reached optimal value, and we are stepping up efforts to divest such assets, and the possibility to make use of such proceeds to make sure we pay out a consistent, sustainable high dividend to excite shareholders.”
Citigroup Research update highlights UOL and City Developments as primary Singapore Property proxies, with 84% and 51% asset exposure, respectively.
“We expect UOL to benefit from decent take-up for two of its residential launches in 2023 (Watten House and PineTree Hill) and expectations of more redevelopments of its aged commercial properties,” the Citi report says.
Liam himself is open to other platforms such as a public or private REIT, a funds management platform, or other tax-efficient vehicles but says the interest rate environment is not conducive to implementing one.
UOL is likely to remain thoughtful about expansion plans. “We have a presence in London and Australia and see capitalisation rate expansion. These will naturally be the first go-to markets to deepen our presence. Regarding asset classes, we would leverage what we already have,” Liam says.
While the macro-environment remains bumpy, there is a flight to quality. He adds: “I do not see the government introducing more cooling measures in 2024. Lower interest rates could bolster housing activities, and our landbank with freehold tenure should be able to capture market share.”
