FEHT could join hands with tycoon Tanoto family to unlock value for the Reit

FAR East Hospitality Trust (FEHT) offers one of the few remaining pure-play Singapore real estate investment trusts (S-Reits), which would appeal to investors averse to risks in overseas property markets.

The stapled group – backed by the Far East Organization group, controlled by the family of the late tycoon Ng Teng Fong – owns a string of hotels and serviced residences in Singapore.

FEHT’s aggregate leverage of 31.5 per cent as at Mar 31, 2024, reflects one of the lowest gearing among S-Reits. This, along with an interest coverage ratio of 3.4 times, should provide comfort to investors in these times of high interest rates.

The stapled group has posted a progressive recovery in distribution per stapled security in the past few years, on the back of the reopening of Singapore post-Covid and the distribution of gains from the divestment of Central Square.

Like many other S-Reits and Singapore property groups, however, the counter is trading well below its net asset value (NAV). FEHT’s S$0.615 closing price on Monday (Jun 24) reflects a nearly 33 per cent discount to its S$0.915 NAV per stapled security as at Mar 31, 2024.

Revitalising the Orchard-Tanglin corner

However, a catalyst to the counter’s price may yet come, from a relatively sleepy stretch of the Orchard Road belt. At 1 Tanglin Road stands the Orchard Rendezvous Hotel, a property in the FEHT portfolio that may be ripe for redevelopment.

The property was formerly known as Orchard Parade Hotel, and prior to that as Ming Court Hotel when it was completed in 1970. Over the years, the hotel has been refurbished and upgraded but it may be opportune to shake things up a little in the area.

There has been market chatter that the Ng family behind FEHT is exploring the possibility of teaming up with the family of tycoon Sukanto Tanoto, which owns the Tanglin Shopping Centre site next door, for a joint redevelopment of the two sites.

Pacific Eagle Real Estate, a Singapore-based real estate investor and developer privately held by the Tanoto family, clinched Tanglin Shopping Centre in 2022 through a S$868 million collective sale. The office, retail and car parking complex was completed in two phases in the 1970s and early 1980s.

A joint redevelopment of these two sites could transform the corner of Orchard and Tanglin roads. The two potential partners could avail themselves of the Urban Redevelopment Authority’s (URA) Strategic Development Incentive (SDI) scheme.

Introduced in 2019, the scheme aims to spur owners of older adjacent commercial or mixed-use developments with predominantly commercial uses in strategic areas to join forces and comprehensively redevelop their properties into innovative projects that would “positively transform the surrounding urban environment”.

Eligible building owners and developers may seek a higher plot ratio (the ratio of maximum gross floor area to site area) as well as flexibility on land use and use quantum, and building height.

The Orchard Rendezvous Hotel is on 87,653 square feet (sq ft) of land zoned for hotel use under the URA Master Plan 2019. Next door, the 68,512 sq ft Tanglin Shopping Centre site is zoned commercial.

The combined land area of 156,165 sq ft offers potential for a sizeable new project, depending on the plot ratio that URA grants for a joint redevelopment of the two assets under the SDI scheme.

One could take reference from URA’s provisional permission last year for a proposed redevelopment of three nearby properties in the Hotel Properties Ltd (HPL) stable: the voco Orchard Singapore hotel, Forum The Shopping Mall and HPL House. The nearly 1.23 million sq ft total approved gross floor area for the proposed mixed development under the SDI scheme is nearly 8.14 times the total land area of nearly 151,000 sq ft.

A potential mixed-use integrated project in a joint redevelopment scheme for Orchard Rendezvous Hotel and Tanglin Shopping Centre may include hotel, retail and office spaces with some residences for sale to help partly finance the development.

Generating buzz

To make the project more unique, the Ng and Tanoto families could perhaps consider incorporating, say, a niche convention or concert venue. Some space could also be dedicated for philanthropic organisations to provide community services. An overall biophilic design including public spaces would help the project to ride on the locale’s proximity to the Singapore Botanic Gardens Unesco World Heritage Site. A carefully thought-out concept has a good shot at uplifting the area.

Orchard Rendezvous Hotel itself sits on four land lots – three freehold sites (totalling about 76,140 sq ft) and a site of about 11,510 sq ft with 99-year leasehold tenure from April 1, 1965.

The hotel was injected into FEHT for its initial public offering in August 2012 by Far East Orchard (formerly known as Orchard Parade Holdings); the company granted a 50-year leasehold interest starting on Aug 27, 2012, in the freehold and leasehold land of the hotel to the trust. Upon expiry of the leasehold interests held by FEHT, title to the property will revert back to the vendor, that is, Far East Orchard.

Mainboard-listed Far East Orchard, which is also the master lessee of the Orchard Rendezvous Hotel under the FEHT structure, is a member of the Far East Organization group of companies, the sponsor of FEHT.

FEHT comprises a Reit and a business trust which has been dormant since FEHT’s listing in August 2012.

For a joint redevelopment of Orchard Rendezvous Hotel and the Tanotos’ Tanglin Shopping Centre, FEHT could rope in Far East Orchard and/or other members of the Far East Organization group of companies.

Another possibility could be for a deal that allows FEHT to first sell the Orchard Rendezvous Hotel to a joint venture (JV) between the Far East Organization group and the Tanoto family. Once the JV has completed the mixed-use integrated development, FEHT could buy the hotel or hospitality component.

Under an update to the SDI scheme by URA on Apr 4, 2022, strata subdivision into individual units will not be allowed for the commercial component of a project approved under this scheme, except when it is to delineate between the different commercial uses, for example, between retail space and offices.

This is to encourage the upkeep and quality of developments, and it would be a positive for a party with a long-term horizon such as FEHT.

Participating in a project that will rejuvenate and transform the strategic corner of Orchard and Tanglin roads could generate more buzz in FEHT, and hopefully uplift its share price.