The acquisition will be funded through a mix of debt and proceeds from the earlier divestment of Lippo Plaza Shanghai, with gearing expected to increase to around 40.2%. The passing yield is around 5.8% and DPU accretion is 0.9% on a pro forma basis.
The asset is a recently completed freehold, 55-storey premium office tower in Circular Quay with near-full occupancy of 99.2% and a long WALE of 5.5 years by income (6.0 years by NLA), supported by a high-quality tenant base including global technology and professional services firms.
"The acquisition marks the start of the next phase of OUE REIT’s growth strategy, reflecting a shift toward higher-quality, longer-duration assets," says Foo in her Feb 25 note.
"It represents the REIT’s entry into Sydney’s core CBD office market, where conditions are showing signs of stabilisation and structural flight-to-quality demand continues to favour best-in-class, newly built, ESG-compliant buildings," she adds.
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Foo notes that the pricing, at 5.8% passing yield, appears broadly in line with recent prime transactions, with Knight Frank’s Feb-26 report indicating core prime yields at around 5.7%.
With this initial 19.9% stake, OUE REIT, says Foo, has gained a "strategic foothold" with the potential to raise its stake over time.
More broadly, the deal supports active portfolio reconstitution by redeploying capital from China and potentially mature assets such as One Raffles Place, which the REIT has confirmed it is looking to sell.
"While earnings accretion is modest, it will help stabilise cash flows and partially fill the earnings gap following the divestment of Lippo Plaza Shanghai," says Foo.
Li Jialin and Lock Mun Yee of CGS International view this deal favourably as well.
Besides adding a prime freehold office asset to its portfolio, operating metrics in the Sydney CBD office market are starting to improve, with both occupancy and rental rates growing.
Following this acquisition, OUE REIT’s portfolio value will climb to $6.1 billion, of which 94.9% is exposed to Singapore, and the portfolio WALE will lengthen to 2.4 years from 2.2 years.
The REIT will see better tenant diversification, with Salesforce and TikTok Australia amongst its top 10 tenants.
Li and Lock estimate that the acquisition will boost the REIT's DPU by 0.9% while aggregate leverage will rise to 40.2% from 38.5%.
Meanwhile, the REIT will continue to look for recycling opportunities to optimise its portfolio.
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Pending completion of the transaction, the analysts have kept their DPU estimates, along with a target price of 41 cents.
"We reiterate 'add' given management’s positive view on rental reversions for Singapore commercial assets and better outlook for the Singapore hospitality segment, driven by a strong event calendar," the analysts add.
For them, re-rating catalysts include accretive acquisitions, earlier-than-expected lease renewal.
On the other hand, downside risks include prolonged downtime from non-renewal of lease, higher-than-expected interest cost.
