OUE C-REIT – CIMB

Prime-grade REIT

OUECT is a prime-grade commercial REIT with a large pipeline of prime commercial properties for potential injection by its sponsor, which is known for executing well-placed acquisitions. We believe it is well-placed for both organic and acquisition growth.

We initiate coverage with an Add rating and a target price of S$0.90 based on DDM (discount rate 7.6%). Catalysts are expected from a Singapore office-market recovery.

Prime-grade REIT

OUECT’s initial portfolio is valued at S$1.56bn (S$1.59bn if including income support) and comprises OUE Bayfront (OUEB) in Singapore and the Lippo Plaza Property (LP) in Shanghai, China, with a total GFA of 105,296 sq m. Both are prime-grade office properties, located in central business districts. In our estimation, OUEB, which makes up 69% of its aggregate value and FY14 rental income, is its crown jewel. We believe that office rents have bottomed and OUECT will be well-placed for an office-rental recovery. OUE Limited, its sponsor, will provide ROFR assets, which could potentially add up to 4m sf of GFA of prime-grade commercial properties for the REIT. Its sponsor has a good record of executing well-placed acquisitions. We believe that this is the key differentiator for OUECT.

NPI support

OUECT’s FY14 asset leverage is estimated to be 42.4%, higher than the average of 37.2% for commercial REITs listed in Singapore. We expect positive rental reversions at OUEB and occupancy uplifts at LP, which should lift its underlying NPI by 4-6% p.a. in FY14-15. Meanwhile, income support will be provided by its sponsor for OUEB for five years, implying a blended gross rent of S$11.80 psf/month, in line with the through-the-cycle average for prime Grade-A commercial properties. This implies a 15% or so uplift in five years, which we think is conservative.

Key risks

Risks include: 1) its inability to renew the lease at LP, with 31 years of lease left as at 1 Jul 13; 2) failure to obtain tax transparency for the income support for OUEB; and 3) weakness in tenant demand in Shanghai on rising supply.