http://www.businesstimes.com.sg/comp...or-good-reason

HOCK LOCK SIEW

Property circuit excited over 2 big deals for good reason

By Kalpana Rashiwala

[email protected]

@KalpanaBT

Jul 8, 2016


THE recent large Singapore office sales - Asia Square Tower 1 for S$3.38 billion and Straits Trading Building for S$560 million - have sparked much-needed buzz in the property investment sales circuit. More than just big money, what excited the market was that the buyers are high-profile investors with long-term investment horizons.

Several office building owners have seen a spike in interest from potential buyers and have used the opportunity to launch their buildings for sale - such as 77 Robinson Road and 110 Robinson Road. A fund managed by Alpha Investment Partners is said to be on the verge of granting exclusivity to ARA Asset Management for doing due diligence for the purchase of its half-stake in Capital Square.

Asia Square Tower 1 was bought by sovereign wealth fund (SWF) Qatar Investment Authority. Indonesian tycoon and philanthropist Tahir (through listed MYP) is buying Straits Trading Building along Battery Road. The profiles of these two buyers typify the type of big money said to be making its way to the Singapore office market: investors taking a strategic long-term view on the island-state.

Unlike traditional institutional investors such as property funds and insurance companies, some SWFs and ultra high networth individuals or their family offices from around the world may not be fettered by pressures to meet short-term investment hurdle rates, suggests Savills Singapore research head Alan Cheong.

In an uncertain world, what these big, long-term investors are seeking is capital safety. Private wealth may be eager to diversify from the traditional playgrounds, where there may be an underlying nervousness on the political and economic fronts.

Investors have traditionally seen Singapore as a relatively safe place to park funds with little currency risk.

"Such investors may be prepared to accept much thinner property yields in the Singapore office market - especially at a time when many developed economies are seeing negative interest rates for benchmark government bonds," Mr Cheong said in a recent report.

"Brexit" could take things to a new level. High networth individuals' monies parked in London are seen to be in search for a new home and Singapore is said to be a favoured spot.

The Asia Square and Straits Trading Building deals already reflect a compression of Singapore office property yields - and a further compression could be possible if this wave of mega investors head to Singapore. These players may be looking at deal sizes of over S$100 million or even above S$500 million, according to some market watchers.

But not any-ol' office building will get the price its owner dreams of fetching.

Although family offices and SWFs have a longer-term horizon, they would still want to park their monies in good-quality buildings in the CBD with sustainable rental income streams - properties the values of which are likely to appreciate in due course.

Yes, Google will move out later this year from Asia Square Tower 1 when its lease for about 130,000 sq ft expires. However, the Grade A spec building in Marina View, completed in 2011, still has a strong attraction for top-notch companies - at the right rental level of course. It has the US Green Building Council's Leadership in Energy & Environment Core & Shell Platinum certification.

As for Straits Trading Building, the existing 28-storey tower was completed in 2009, as a redevelopment of the original 21-storey block on the site that was built in 1972. It has a solid anchor tenant in Rajah & Tann; its lease still has some time more to go.

What prospects would a wave of big money present for some of Singapore's major office landlords?

Well, a reduction in cap rates for office properties and hence an increase in office prices would make it difficult for office Reits (real estate investment trusts) to make yield-accretive acquisitions on the island.

"On a positive note, it would be a great time for these Reits to sell off any office blocks they may be thinking of disposing of," says Tang Wei Leng, managing director of Colliers Singapore.

To their credit, Reits do a good job of doing asset enhancement works and keeping their property portfolios in tip-top shape - all done with the goal of maximising rental income and distributions to unitholders of course.

However, owners of older office blocks - including City Developments and United Industrial Corporation (which includes Singapore Land) - may need to upgrade some of their ageing buildings to keep up-to-date with the latest Grade A office specifications and green building standards - notwithstanding the fact that many of these buildings are in ultra-prime locations in the old Raffles Place financial district.

Even trusty old tenants in these buildings will doubtless be drawn to some of the newer office developments in a flight to quality. A case in point would be The Bank of Tokyo-Mitsubishi UFJ (BTMU), the anchor tenant of Republic Plaza; it has made a strategic decision not to renew its lease for about 150,000 sq ft that it occupies at Republic Plaza, which is due in mid-2017.

What some of these "grande dames" could do is a makeover - to ensure they even have a shot at retaining tenants with leases up for renewal, amid the competition from a substantial completion of new office space in the next 12 months.

Sprucing up and getting a new lease of life is what CapitaLand Commercial Trust (CCT) did for Six Battery Road from 2010 to 2013. CCT tied in the upgrading of interior office spaces with the natural lease expiry profile. The stage-by-stage spruce-up of the 42-storey building resulted in, among other things, the ceiling height for the building's office floors raised by 20 cm to 2.8 metres. And for its numerous environmentally-friendly features, the building clinched the Building and Construction Authority's Green Mark Platinum award, the first time an operating office building here won the top Green Mark accolade.

In some cases, it would make sense for landlords to tear down an obsolescent building and build a modern office tower on the site.

Given the interest sparked by the two recent large office transactions, the scene looks set for more mega sales.