Broker: KGI Securities (Singapore) Pte. Ltd.
Date of Report: May 2, 2025

OUE REIT: Resilient Singapore Portfolio Sets the Stage for Tourism-Led Growth and Capital Flexibility in 2025

Executive Summary: OUE REIT Eyes Growth Amid Portfolio Reshaping and Singapore’s Tourism Surge

OUE Real Estate Investment Trust (OUE REIT) has navigated a transformative first quarter of 2025, marked by strategic portfolio realignment, robust operational metrics, and a poised stance to capitalize on the expected tourism boom in Singapore. Despite a softer quarter due to asset divestment and a hospitality pullback, OUE REIT’s resilience, prudent capital management, and diversified sector exposure underpin its outlook for stable returns and new growth opportunities.

Financial Highlights: 1Q25 Performance and Strategic Moves

• Revenue and NPI Decline: OUE REIT saw a year-on-year drop in revenue and net property income (NPI) by 11.9% and 12.1% respectively in 1Q25, largely due to the absence of contributions from Lippo Plaza after its divestment and a softer hospitality segment.
• Like-for-Like Resilience: Adjusted for the divestment, revenue and NPI fell by a more modest 3.9% and 4.1% YoY, highlighting underlying portfolio strength.
• Occupancy Rates: Office occupancy stood at an impressive 96.3%, with retail at 99.5%. Rental reversions were healthy at 9.9% for office and 4.9% for retail.
• Debt Management: Financing costs fell 11.3% YoY to S\$22.6 million, with the average cost of debt dropping to 4.2% (down from 4.7%). Proactive refinancing and interest rate hedging have provided further upside potential.
• Aggregate Leverage: Slightly rose to 40.6%, with an interest coverage ratio of 2.1x, indicating continued financial flexibility.
• Management Fee Change: From 4Q24, base management fees shifted to a 50% cash, 50% units structure, better aligning manager and unitholder interests and supporting DPU stability.

Strategic Portfolio Reshaping: Lippo Plaza Divestment and Capital Flexibility

OUE REIT completed the divestment of Lippo Plaza in Shanghai in December 2024, realizing RMB1,917.0 million (S$357.4 million). This move enhances portfolio resilience, unlocks financial flexibility, and sets the stage for future growth and opportunistic acquisitions, particularly within Singapore and potentially in key gateway cities like Sydney and Tokyo.

Sectoral Performance: Office, Hospitality, and Retail

Prime CBD Office Strength

• Leasing Momentum: OUE REIT’s office portfolio posted a 96.3% occupancy rate as of March 31, 2025, with a 9.9% positive rental reversion for lease renewals.
• Passing Rent: Average rent rose to S\$10.77 per square foot per month, reflecting demand for Grade A assets in Singapore’s Core CBD.
• Market Context: Despite an uptick in islandwide vacancy to 11.7%, the Core CBD remains resilient, with tenants favoring renewals over relocations amid economic uncertainty.

Hospitality Segment: Normalizing from Strong Base

• 1Q25 Moderation: Hospitality revenue and NPI fell 13.3% and 12.5% YoY to S\$23.3 million and S\$20.8 million, respectively, normalizing from an exceptionally strong 1Q24.
• RevPAR: Portfolio RevPAR averaged S\$248. Crowne Plaza Changi Airport achieved 8.9% YoY RevPAR growth (S\$247), while Hilton Singapore Orchard’s RevPAR was S\$249.
• Event-Driven Upside: A robust line-up of major events—including Lady Gaga’s four-night concert, F1 Grand Prix, and performances by G-Dragon and Elton John—is set to drive a tourism surge in 2H25.

Retail Segment: Anchored by Orchard Road Recovery

• Retail Rents: Orchard Road retail rents are expected to recover to pre-pandemic levels by end-2025, supported by limited new supply and resilient domestic consumption.
• Occupancy: Retail segment occupancy remains near full, supporting stable income streams.

Portfolio Diversification Mitigates Concentration Risk

• Revenue Mix (1Q25): Office 50.2%, Hospitality 33.0%, Retail 16.8%. No single asset contributed more than 27% of revenue.
• Geographic Focus: OUE REIT is now a Singapore-only portfolio, reducing international exposure risks while benefiting from Singapore’s status as a financial, business, and tourism safe haven.

Outlook: Tourism-Led Tailwinds and Strategic Growth Initiatives

Singapore Tourism Boom to Bolster Hospitality and Retail

• Singapore Tourism Board projects 17–18.5 million international arrivals in 2025, with tourism receipts to reach S\$29–30.5 billion.
• The government’s Tourism 2040 roadmap targets up to S\$50 billion in annual receipts, with the MICE sector expected to triple its contribution to total receipts by 2040.
• Upcoming attractions and the revitalization of key shopping corridors (Orchard Road, Minion Land, Singapore Oceanarium) will sustain demand for OUE REIT’s assets.

Office Market: Tight Supply Supports Rental Resilience

• URA’s office rental index rose 0.3% QoQ in 1Q25, with a 2% YoY increase for Singapore’s central region.
• Limited new completions and the gradual absorption of existing stock are expected to drive vacancy rates lower, supporting rental growth and occupancy stability.

Strategic Capital Recycling and Acquisition Pipeline

• Proceeds from the Lippo Plaza divestment can be used to reduce gearing, invest in new yield-accretive acquisitions, and strengthen capital buffers.
• Management is open to selective acquisitions in gateway cities, focusing on prime CBD office and well-located hospitality assets.

Financials at a Glance

Valuation and Recommendation: OUTPERFORM with S\$0.318 Target Price

• Valuation Method: Dividend Discount Model (DDM) with a terminal growth rate of 2.0% and cost of equity at 9.0%.
• 12-Month Target Price: S\$0.318 per unit, representing 15.8% upside including dividends.
• Investment Case: OUE REIT’s fully Singapore-based, diversified portfolio, combined with disciplined capital management and tourism-led growth prospects, supports a compelling investment thesis for risk-conscious investors seeking stable returns.

Risks to Watch

• Macroeconomic Volatility: Global economic headwinds could impact occupier demand and tourism flows.
• Asset Concentration: While diversified by segment, the Singapore-only focus could increase exposure to local market risks.
• Regulatory Shifts: Changes in government policies or tax treatment may affect profitability.
• Interest Rates: Prolonged high rates could pressure borrowing costs and distributable income.

Key Shareholders and Trading Data

• Major Shareholders: OUE Realty Pte Ltd (22.3%), Tang Gordon (9.1%), Yang Chanzhen (4.9%)
• Market Cap: S\$1,542 million
• Issued Shares: 5,507 million
• Free Float: 37.1%
• 52 Week Range: S\$0.25 – S\$0.34
• Recent Price: S\$0.28 (as of April 30, 2025)
• 1-Year Performance: +11.7%

Conclusion: Refocused, Resilient, and Ready for Accretive Growth

OUE REIT has emerged from a period of strategic reshaping with a more resilient, Singapore-centric portfolio, robust operational performance, and ample financial flexibility. As Singapore’s tourism sector gears up for a strong 2025 and the office market benefits from tight supply, the REIT is well-positioned to deliver stable distributions and pursue yield-accretive growth opportunities. With disciplined capital management and a defensive asset base, OUE REIT remains a compelling choice for investors seeking both income stability and upside potential in a volatile macroeconomic environment.