OUE Commercial Reit looks to acquire office assets in Sydney, Melbourne and London

JUST 1 out of the 7 assets in OUE Commercial Real Estate Investment Trust’s (OUE C-Reit’s) portfolio is outside Singapore, but there are plans to acquire more overseas assets to grow the trust, with a focus on office assets in Sydney, Melbourne and London.

“These are key gateway markets with a lot of liquidity for transactions in the S$200 million to S$400 million range; so you can enter and exit the market fairly quickly,” said Han Khim Siew, the chief executive officer of OUE Commercial Reit Management. “The UK and Australia also have very good market transparency and governance.”

The trust is eyeing office properties in those 3 cities (with some supporting retail if any), but it is unlikely to go for pure retail assets, he added. “Hospitality assets, we will look at selectively.”

While all 7 existing assets of the Reit were from its sponsor, OUE, the overseas assets that the Reit is looking to buy will be third-party acquisitions.

Han also said that “we want to keep the majority of our asset composition in Singapore”. For the year ended Dec 31, 2021, 90 per cent of OUE C-Reit’s revenue was from Singapore.

Close to 60 per cent of the Reit’s revenue last year was from its office assets, about 25 per cent from its hospitality assets and 15 per cent from retail assets.

A key factor that has paved the way for the Reit to position itself for growth was the divestment of a half-stake in OUE Bayfront for S$634 million, which was completed in March 2021.

In turn, this capital recycling and portfolio reconstitution strategy has been facilitated by OUE C-Reit’s merger with OUE Hospitality Trust in 2019, combining OUE C-Reit’s 4 properties with OUE Hospitality Trust’s 3 assets, resulting in a total asset size of S$6.8 billion.

In a similar vein, OUE Hospitality Trust, with only 3 assets, may not have found it as feasible to embark on the revamp/rebranding of its Orchard Road hotel as it would have meant taking its biggest asset out of play.

Han said the rebranded hotel, Hilton Singapore Orchard, will contribute its maiden full-year income only next year. Some 40 per cent of the total 1,080 rooms inventory is being refurbished and this is slated for completion in H2 this year, hopefully in time for this year’s Singapore Grand Prix at the end of September.

OUE C-Reit’s top priority is to  strengthen its capital structure amid rising interest rates. Some 72.4 per cent of its S$2.26 billion total debt as at end-2021 is on fixed interest rates. About 7.6 per cent of its debt matures this year, but OUE C-Reit is also looking to refinance this year part or all of the 24 per cent of its total debt that falls due next year - to try and lock in the rates as well.

“A 100-basis-point increase in interest rates will translate into a S$6 million impact on our distributable income,” says Han. The Reit’s amount available for distribution in FY2021 was S$131.6 million.

Han, who was formerly co-head of Asia-Pacific at BNP Paribas Real Estate before being appointed to his current position in February, also highlights that a large part of OUE C-Reit’s assets are encumbered (that is, with secured loans). He hopes that with the support of its banks, by a certain period, it can get all its assets unencumbered, similar to where a number of its peers are at already. This would allow greater borrowing flexibility - including for overseas acquisitions - and typically results in better terms and lower interest rates.

A major challenge ahead for OUE C-Reit is rising costs - including electricity and labour, which affect property management costs. The group is tackling these through greater use of technology.

Han is positive about the outlook for the various segments of the Singapore market OUE C-Reit is involved in. “The office market has bottomed and it is picking up. Our retail and hotel assets will benefit from the opening of the borders and loosening of Covid restrictions.”

He said that the Reit’s hospitality assets - besides the Hilton Singapore Orchard, it also owns the Crowne Plaza Changi Airport - are “well positioned for the inflationary period coming up because you can move room rates up on a daily basis, whereas for office rents, you are locked in for 3 years”.

“The increase in hospitality income through the increase in our room rates will allow us to buffer against cost rises,” added Han.

OUE Limited, controlled by the Riady family, is not only the sponsor of OUE C-Reit of which it owns 48.22 per cent (based on data as at Mar 7, 2022) but is also the master lessee for both hospitality assets owned by the Reit. (*see amendment note)

In its capacity as master lessee, OUE entered into a branding and management agreement with Hilton in March 2020 for the former Mandarin hotel.

A refurbishment exercise was embarked upon, with the first phase kicking off in February 2021 and ending a year later with Hilton Singapore Orchard soft opening on Feb 24. The room count in the 39-storey Mandarin Wing, parallel to Orchard Road, rose slightly from 631 to 634.

At the hotel’s lobby, on the ground floor of Orchard Wing (parallel to Orchard Link), some carpark lots on level 2 were demolished to create double-volume space.

Also in the Orchard Wing, all the carpark lots on level 5 were removed to create space for 7 new meeting rooms, a communal lounge for coffee breaks and other casual breakout areas. These are integrated with the Grand Ballroom on level 6 (which can be partitioned into 3 smaller ballrooms) and the existing 5 meeting rooms on level 8, allowing MICE organisers to manage efficiently their events within the Orchard Wing.

All in, the hotel has 16 meeting (including ballroom) spaces totalling 2,400 square metres net lettable area. All but one are in the Orchard Wing; the exception is the Imperial Ballroom, which is in the Mandarin Wing.

Said OUE’s deputy CEO Brian Riady: “Hilton Singapore Orchard offers one of the largest event venues in the heart of Orchard Road….Leveraging on Hilton’s strength in business travel and MICE, the hotel is able to diversify the business mix by tapping into the higher-yielding luxury market from North America and Europe for both corporate and leisure segments, complementing the property’s traditional strength in serving Asian leisure travellers.”

The hotel has 5 dining concepts, 4 of which are operating with the fifth, Italian restaurant Osteria Mozza, set to open by June.

Under the second phase of the hotel’s refurbishment, which began earlier this year and is targeted for completion in H2 2022, the 446 rooms in the Orchard Wing are being spruced up.

Also under phase 2, the previous Meritus Club Lounge, which was formerly a revolving restaurant known as the Top of the M, will be recreated into a new destination bar that will pay homage to the history of the Mandarin hotel.

The hotel’s refurbishment cost is S$150 million, of which S$90 million is being paid by OUE C-Reit and the remaining S$60 million funded mostly by OUE with some contribution by Hilton.

A key factor that has enabled the renovations in the hotel is the S$45 million minimum rental income per annum for the property guaranteed by OUE as the master lessee, which has provided downside income protection to OUE C-Reit’s unitholders throughout the period of phased renovation and ramping-up of operations.

*Amendment note: An earlier version of this article had stated that OUE owns 50.47 per cent of OUE C-Reit. The Reit has clarified that the figure refers to the stake owned by OUE Limited and related parties. OUE Limited itself owns 48.22 per cent of OUE C-Reit.