OUE C-REIT Eyes Opportunities in Australia, UK in Drive to Boost Income

After reporting sustained growth in Singapore office space, OUE Commercial REIT’s chief executive is keen on growing the trust’s overseas portfolio in the year ahead as opportunistic office deals arise in its target markets of Sydney, Melbourne and London.

Han Khim Siew, the chief executive and executive director of OUE C-REIT’s manager, told Mingtiandi that the S$5.8 billion ($4.2 billion) trust continues to search for repriced office properties in the three markets, taking advantage of the recent rise in interest rates which has pushed some investors to sell assets at discounted rates.

“As a REIT, we are looking to grow in the medium term, in the short term, but if you look past the immediate dark clouds, things will improve and we are looking at growing (in target) destinations — Sydney, Melbourne and London,” Han said in an interview on Friday. “We’re still seeing some repricing, but we don’t believe the dislocation has happened in a sizeable way for us to actually acquire in an accretive manner, so we are monitoring the situation.”

He hinted at “very interesting opportunities coming up” in the next 9-12 months for OUE C-REIT, which saw its net property income rise by 4.4 percent year-on-year to S$48.3 million in the third quarter on improving office rents and hotel revenue, according to a business update issued Thursday.

Targeting Core Locations

While taking on yield-accretive acquisitions is “quite challenging” at a time that interest rates are skyrocketing and cap rates are shrinking, Han said reconstituting the portfolio is still not off the table if it means reinvesting capital into higher-yielding assets.

Han picked Sydney, Melbourne and London as the trust’s target markets given the longer leases, good governance and deep institutional markets in those cities.

“We will be keeping in line with our DNA, which is prime core locations, because we believe that’s super defensive,” he said. “We saw that during the crisis where there’s a flight to quality for tenants that have moved from poor quality to high to better quality buildings, so we were able to defend occupancy pretty well.”

Another way to grow the REIT is by upgrading assets to boost revenue. Han noted that the manager is looking at potential asset enhancement initiatives to take on in the next 1-2 years.

While the trust is still working to complete renovations on its 1,080-key Hilton Singapore Orchard by the end of the year, revenue per available room (RevPAR) for the five-star hotel along the famous shopping belt has already jumped by 10.2 percent to S$332 in the quarter versus the previous three months.

Sponsored by OUE Group, which is controlled by Indonesia’s Riady family, OUE C-REIT manages a S$5.8 billion portfolio spread across six office, retail and hospitality assets in Singapore, as well as the 91 percent stake it holds in a commercial building in Shanghai.

China Asset Underwhelms

Its latest business update released last week showed revenue in the third quarter inching up 1.7 percent compared with a year ago to to S$59.5 million. Revenue from commercial properties rose by 2.4 percent to S$42.6 billion while hotel revenue was unchanged at S$16.9 million.

Its two hotels, Hilton Singapore Orchard and Crowne Plaza Changi Airport, posted a 15.5 percent annual surge in RevPAR to S$262 last quarter. On the retail front, shopper traffic and tenant sales in its Mandarin Gallery shopping centre on Orchard Road were still 90 percent and 85 percent below their respective pre-pandemic levels with monthly rent holding steady at S$20.89 per square foot.

Last quarter’s earnings were tempered by the poor performance of the trust’s sole mainland asset. Office occupancy in its Lippo Plaza commercial building in Shanghai dipped by 2.1 percentage points to 85.6 percent while it continues to issue rental rebates to help its retail tenants.

“We are facing headwinds in China, tenants are obviously trying to renew at lower rents because they believe that the next 12-18 months, the economic conditions are uncertain,” Han said, adding that the priority is to increase occupancy in the Shanghai asset, which accounts for 10 percent of the trust’s income.

For next year, he is seeing higher office income in Singapore after the trust signed more lease agreements with higher rents, while expecting the retail segment to recover as occupancy and shopper traffic improve.

Aussie, UK Deals Down

OUE C-REIT’s goal to enter Australia and the UK comes as the two markets are seeing commercial property transactions drop from earlier levels.

According to data from MSCI Real Assets, the volume of commercial properties that changed hands in Australia has fallen for two straight quarters, dropping 24 percent year-on-year to A$16.4 billion ($10.6 billion) in the three months end 30 September.

Real estate investment also dipped in Europe last quarter, with deal activity in its three largest markets, including the UK, down at least 30 percent from a year earlier based on a separate MSCI Real Assets report.