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Will OUE Commercial Reit sell some of its assets?

OUE this week completed the sale of the landmark US Bank Tower in Los Angeles for US$430 million, or at two-thirds of its US$650 million valuation as at Dec 31, 2019.

Among other things, the disposal will allow the group to substantially boost its cash reserves and improve its net gearing ratio by paring down existing debts. What else could be on the cards for OUE?

Talk on the grapevine is that asset sales action may come from the group’s sponsored real estate investment trust OUE Commercial Reit – in which OUE Group has a 47.8 per cent stake (as at June 30, 2020).

The Riady family behind OUE, it seems, is open to receiving offers for just about any of the Reit’s assets – especially OUE Downtown Office in Shenton Way, which is on land with a relatively short balance leasehold tenure of 46 years – before it decides just what to divest.

BT understands the group is also willing to part with the 563-room hotel Crowne Plaza Changi Airport, which was valued at S$883,000 per key at end-2019.

Potential buyers with preferred profiles have also been approached discreetly for the Reit’s 67.95 per cent effective interest in One Raffles Place – an office and retail asset in the heart of Singapore’s traditional financial district.

Even the jewel in the crown – the OUE Bayfront office development – may be available for sale, at least for a partial stake of, say, 40 per cent. The trust fully owns this prime Grade A office asset standing between Raffles Place and the Marina Bay new downtown.

Talk of the potential divestments comes just a year after the Reit’s merger with OUE Hospitality Trust, resulting in combined assets of S$6.8 billion. The merged entity has seven assets – of which three are from the hospitality trust.

When the merger was announced, the managers of the two Reits had said that the enlarged entity will provide “enhanced portfolio diversification and resilience”.

Divesting assets would seem like a change in plans. Could this have been sparked by proactive agents

and/or unsolicited interest from potential buyers?

More likely, it reflects challenges from the Covid-19 pandemic, especially for hotel assets. Even demand for office space is not expected to be unscathed from corporate downsizing and work from home taking root during the pandemic.

Aggregate leverage

Other factors may also be at play.

OUE Commercial Reit’s aggregate leverage of 40.1 per cent as at end-June 2020 is higher than some S-Reits though still below the 50 per cent regulatory limit.

Its sponsor’s net gearing, however, is on the high side. According to an OCBC Investment Research report dated Aug 7 this year, OUE’s net gearing stood at 86.2 per cent as at Dec 31, 2019 but is projected to fall to 73.9 per cent by the end of FY2020.

If OUE Commercial Reit were to sell some assets, it could use the proceeds to repay some of its borrowings and reduce aggregate leverage.

Beyond that, there is the possibility of making capital distributions from divestment gains to all unit holders – including its sponsor, OUE.

OUE could use the monies to cut its own debt and build a stronger cushion against the vagaries of the economic slowdown.

One could extend the picture to the Riady family’s business empire in Indonesia, where Lippo Karawaci, the family’s listed property arm, is still in the process of restructuring – in the aftermath of the cash squeeze triggered by its ambitious US$18 billion Meikarta township development in Bekasi, West Java.

Furthermore, with the Covid-19 pandemic having devastated the Indonesian property market, Lippo Karawaci’s ability to repay loans has been significantly hampered.

Capital distributions that OUE could potentially receive from OUE Commercial Reit’s divestment gains may in turn be channelled to OUE’s shareholders, by way of, say, special dividends or even a capital reduction. The Riady family, as the ultimate controlling shareholders of OUE, will have the option to funnel the money to Lippo Karawaci.

Now let’s take a closer look at some of OUE Commercial Reit’s assets to see what’s on offer.

Its biggest asset is One Raffles Place, for which a global property consulting group is understood to have discreetly sussed out interest of potential buyers recently.

Market watchers believe the indicative pricing may be in the high-S$2,000-psf range.

The asset comprises two office towers – 62 storeys and 38 storeys – and a retail podium with a total net lettable area (NLA) of about 860,000 sq ft.

The development is on four land parcels with a mix of tenures – one plot with 841-year leasehold tenure (starting November 1985) and three plots with 99-year leasehold tenures (two starting from May 1983 and the third from November 1985).

OUE Commercial Reit has an indirect interest of 83.33 per cent in OUB Centre Limited (OUBC), which in turn has 81.54 per cent interest in One Raffles Place – resulting in the Reit having an effective 67.95 per cent interest in the property.

Assuming a guide price of S$2,950 psf, OUE Commercial Reit’s effective interest would amount to S$1.72 billion. OUBC’s interest in the property was valued at the end of last year at S$2,667 psf.

Talk in the market is that following an exercise conducted by the property consulting group to find a buyer for OUE Commercial Reit’s stake in One Raffles Place, some parties are being shortlisted. Potential buyers, however, have expressed interest to take the entire property, and not just the Reit’s stake.

The other owners of the development include United Overseas Bank, UOL Group and Khattar Holdings and efforts are probably underway to see if they would like to divest their interests in the asset alongside the Reit.

Yield play

Assuming a price of S$2,950 psf, full interest in the asset would amount to S$2.53 billion. The building’s current gross floor area (GFA) of about 1.29 million sq ft is already slightly over 17 times the site area. This exceeds the 15.0 gross plot ratio for the commercial-zoned site under the Urban Redevelopment Authority’s Master Plan 2019. This site also does not come under the URA’s CBD Incentive Scheme. In short, there is not much redevelopment potential for One Raffles Place.

Nevertheless, given its prime location next to Raffles Place MRT Station, the property may appeal to core investors looking at yield play, such as insurance companies, pension funds, sovereign wealth funds and core funds managed by private equity fund managers. The property is less likely to draw a buyer eyeing significant value-add potential by refurbishing the asset, or even redeveloping it.

Typical office floor-plates at One Raffles Place are relatively small at about 9,000 sq ft for Tower 1 (completed in 1988) and 11,000 sq ft at Tower 2 (completed in 2012). Major tenants in the development include flexible space operators Regus (in Tower 2) and Spaces and Virgin Active (both in the retail podium).

Potential buyers looking for a more modern office asset may prefer OUE Bayfront in Collyer Quay. It has larger floor plates of around 26,000-30,000 sq ft and stands on a site that still has a balance tenure of 86 years. Its committed office occupancy as at June 30 was 100 per cent.

The development’s NLA of 399,824 sq ft comprises predominantly offices and a 5 per cent retail component. Bank of America Merrill Lynch is an anchor tenant. OUE Bayfront was valued at S$2,954 psf or S$1.18 billion at the end of last year.

The trust’s asking price could be at least S$3,300 psf, suggest observers.

The other assets in the Reit’s portfolio include Lippo Plaza in Shanghai, Mandarin Gallery and the Mandarin Orchard Singapore hotel in Orchard Road. The hotel will be rebranded to Hilton after a revamp.

Beyond the impact on the Riady family, if OUE Commercial Reit does sell even a couple of its assets, it would help liven up the current moribund market for big-ticket property transactions in Singapore.

By Kalpana Rashiwala, Business Time / 18-Sep-2020

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