2018 Second Quarter Financial Results (02 Aug 2018)
Statements of Total Return
Statements of Financial Position
Review of Performance
Review of OUE C-REIT Group's performance 2Q 2018 vs 2Q 2017
2Q 2018 net property income of S$33.9 million was 2.4% lower compared to S$34.8 million achieved in 2Q 2017. This was due mainly to lower retail revenue from One Raffles Place Shopping Mall as a result of transitional vacancy from the departure of an anchor tenant. This lower retail revenue in 2Q 2018 was partially offset by lower utilities cost recorded in the current reporting period.
Other income was S$0.3 million higher in 2Q 2018 compared to 2Q 2017, due to higher income support drawdown in relation to OUE Bayfront from the Sponsor.
Net finance cost increased S$1.2 million year-on-year mainly attributable to higher interest cost of S$1.4 million, resulting from higher level of borrowings.
Consequently, total return for 2Q 2018 decreased 9.8% to S$15.3 million, compared to S$16.9 million in 2Q 2017.
Review of OUE C-REIT Group's performance 1H 2018 vs 1H 2017
1H 2018 net property income of S$69.2 million was marginally lower than 1H 2017 by S$0.2 million. Lower retail revenue, stemming from transitional vacancy from the departure of an anchor tenant at One Raffles Place, was mitigated by lower maintenance expenses and utilities cost in the current reporting period.
Other income was S$0.6 million higher in 1H 2018 compared to 1H 2017, due to higher income support drawdown in relation to OUE Bayfront from the Sponsor.
Net finance cost decreased S$0.9 million year-on-year mainly attributable to net IRS's fair value gain of S$0.7 million in 1H 2018, as compared to S$1.3 million fair value loss in 1H 2017 and lower debt establishment cost. Both have no DPU impact. This is partially offset by higher interest cost of S$2.3 million, which was a result of higher level of borrowings.
Consequently, total return for 1H 2018 increased 5.1% to S$31.4 million, compared to S$29.9 million in 1H 2017.
Commentary on the competitive conditions of the industry in which the Group operates and any known factors or events that may affect the Group in the next reporting period and the next 12 months
Based on advance estimates by the Ministry of Trade and Industry ("MTI"), Singapore's 2Q 2018 GDP growth was 3.8%(1), moderating from 1Q 2018 growth of 4.3%, but ahead of MTI's 2018 GDP growth forecast of between 2.5% and 3.5%. Growth in the manufacturing sector slowed to 8.6% YoY, from 9.7% in the previous quarter, driven by the electronics and biomedical manufacturing clusters. The services sector expanded by 3.4% YoY, easing from the 4.0% growth in the previous quarter, supported by finance & insurance and wholesale & retail trade sectors. MTI expects the economy to remain on a steady expansion path, with the key downside risk being further headwinds from US-China trade tensions.
According to CBRE, islandwide net absorption for office space in 2Q 2018 was 503,907 sq ft, due mainly to healthy level of pre-commitment at a newly completed office building.As market fundamentals continued to be strong, core CBD office occupancy remained unchanged at 94.1%(2) as at 2Q 2018, with demand supported by co-working operators, technology firms as well as the insurance sector. As a result of the tight vacancy environment, rental growth for Grade A CBD Core office accelerated to 4.1% quarter-on-quarter ("QoQ") to S$10.10 psf per month, the fastest pace of growth since 1Q 2014.
Given the pace of recovery in office market rents in the Singapore CBD, OUE Bayfront achieved positive rental reversions for the lease renewals and rent reviews committed in 2Q 2018. At One Raffles Place, due to the narrowing gap between expiring rents and market rents, the extent of negative reversions in 2018 is expected to be less than that in 2017. Further, One Raffles Place's 2018 revenue base has improved due to the notable increase in committed office occupancy achieved in 2017, thereby mitigating the impact of any negative reversions.
China's economy grew 6.7%(3) in 2Q 2018, slowing slightly from 6.8% in 1Q 2018 but ahead of the official target of around 6.5%. Given the slowing property market, 1H 2018 fixed asset investment growth of 6.0% was a record low, while June industrial output growth of 6.0% was the lowest growth rate in two years. Growth momentum is expected to continue easing, given the drag from the US-China trade war and the authorities' commitment to implement tight monetary policy to achieve financial deleveraging.
According to Colliers International, Shanghai CBD Grade A office occupancy increased 2.9 ppt QoQ to 89.4%(4) as at 2Q 2018, supported by strong net absorption of 217,000 sq m for the quarter. Major sectors driving demand were finance, professional services, trading, technology, media & telecommunications as well as flexible workspace operators. Consequently, Shanghai CBD Grade A office rents rose 0.8% QoQ to RMB10.36 psm per day as at 2Q 2018. In Puxi, Grade A office occupancy improved 4.5 ppt QoQ to 90.7% as at 2Q 2018, while rents increased 1.6% QoQ to RMB 9.46 psm per day.
A significant amount of new office supply is expected to enter the Shanghai market over the next two years, before easing in 2020. Nevertheless, healthy demand from the finance and technology sectors are expected to underpin occupancy as well as rental rates in Shanghai.
(1) Singapore Ministry of Trade and Industry Press Release, 13 July 2018
(2) CBRE, Singapore MarketView 2Q 2018
(3) National Bureau of Statistics of China Press Release, 16 July 2018
(4) Colliers International, Shanghai Office Quarterly 2Q 2018, 30 July 2018