Property developer OUE is selling the office component of its 1.24 million square foot (115,000 square metre) OUE Downtown complex to OUE Commercial Real Estate Investment Trust (OUE C-REIT) for S$908 million ($661 million), according to a recent announcement by the Singapore-listed company.
The proposed sale by the developer to its affiliated REIT comes amid a surge of investments in Singapore commercial buildings, as a more than 14 percent year-on-year jump in grade A office rentals boosts investor interest in the city’s office sector.
OUE C-REIT Seeks More Exposure to Singapore Downtown Office Submarkets
Tan Shu Lin, CEO of OUE C-REIT, said that the acquisition will increase the trust’s exposure to a rising Singapore office market and enhance its competitive positioning, allowing it to capture tenant demand within Singapore’s three downtown office submarkets of Raffles Place, Marina Bay area and Shenton Way/Tanjong Pagar.
OUE C-REIT is 55.9 percent owned by OUE, with the parties indicating in a statement that the transaction was conducted on a willing-buyer and willing-seller basis.
“We believe the property value of S$1,713 per square foot and acquisition net property income yield of five percent is very attractive for a landmark Grade A asset in the CBD,” Tan pointed out.
Sale Follows Refurbishment
OUE last year refurbished the twin towers of the complex last year after originally purchasing the former DBS Building Towers for S$870.5 million in 2010. As part of the renovation, the low to mid-zones of OUE Downtown 1 were converted into 268 units of serviced residences with full-fledged facilities and the existing podium repositioned as a retail podium named Downtown Gallery.
The proposed sale, however, includes only the grade A office space contained within the 35th to 46th storeys of Tower 1 and the 7th to 34th storeys of Tower 2, the two sets of office space combined reach a net lettable area of 529,981 square feet (49,000 square metres).
As of June 30, OUE Downtown’s offices registered a stable occupancy rate of 95.1 percent with passing rents at S$7 per square foot, compared to the Q1 2018 market rent of S$8.43 per square foot for the Shenton Way/Tanjong Pagar submarket. With the end-2018 forecast market rent for prime office space in the area estimated between S$8.40 to S$9 per square per month, OUE will provide rental support of up to an aggregate amount of S$60 million or for a period of up to five years, according to its exchange filings.
Together with the rental support, the properties are expected to generate an acquisition net property income yield of about five percent.
Investor Confidence Driving Office Deals
In its most recent report on the market for Singapore office investments, property consultancy JLL noted, “Investor confidence in the office market, on the back of positive leasing momentum and relatively stable office stock given the lack of land supply for new office developments in the CBD, should continue to drive capital value growth.”
The brokerage cited growth in grade A office rentals of 14.5 percent during the second quarter, compared to the same period last year, as supporting the market for office investments.
The return of international investors to the Singapore office market was reconfirmed in June, when CapitaLand Commercial Trust (CCT) agreed to sell Twenty Anson, a 20-storey office building in the Tanjong Pagar neighbourhood, to US private equity firm AEW Capital Management for a total of S$516 million (then $379 million).
During July, UK property developer Chelsfield was said to be in due diligence on a deal to purchase the Manulife Centre on Singapore’s Bras Basah Road from a joint venture between a fund managed by Keppel Corp’s Alpha Investment Partners and Singapore-listed developer City Developments Ltd for a price estimated at around S$550 million.
Rights Issue to Help Fund Acquisition
To help pay for the acquisition, totaling S$955.9 million with fees and expenses included, OUE C-REIT is proposing to raise S$587.5 million through an underwritten and renounceable rights issue of 1.29 million new units, with the balance of funding to be arranged via debt. Eligible unit-holders will be entitled to subscribe on an 83-for-100 rights issue at S$0.456, or a 31 percent discount to September 10’s price of S$0.665.
OUE, which owns 867.5 million units representing 55.9 percent stake in OUE C-REIT, has agreed to fully subscribe for its entitlement in the rights issue. It is also sub-underwriting 66 percent of the total number of underwritten rights unit.