Locally listed landlords face tough calls as Singapore office property market reprices

May 24, 2023

NO SINGAPORE office building has sold for S$500 million or more since last June. Institutional investors – the typical buyers of larger office buildings – are clearly not in the mood to acquire, with borrowing costs now exceeding office property yields.

Nevertheless, a few owners have quietly put their big-ticket office buildings on the market.

Expression-of-interest exercises closed recently for Mapletree Anson, which is owned by Singapore-listed real estate investment trust Mapletree Pan Asia Commercial Trust (MPACT), and for a half-stake in Qatar Investment Authority’s (QIA’s) Asia Square Tower 1 (T1).

MPACT is understood to be eyeing S$880 million for its office tower at the corner of Anson Road and Gopeng Street. This is 17 per cent above the S$752 million valuation for the property barely two months ago.

The indicative pricing for the 50 per cent stake in Asia Square T1 is said to be nearly S$2 billion.

Also, The Business Times understands Keppel Corporation has appointed CBRE and JLL to find a buyer for a 50 per cent stake in the 33-storey Keppel South Central project. Expected to be completed in the fourth quarter of 2024, the project is coming up on the freehold site of the former Keppel Towers along Hoe Chiang Road.

Market observers expect the price of the half stake to be over S$1 billion.

What is motivating these owners to put properties on the market despite the lacklustre demand?

For MPACT, a portfolio reconstitution strategy may be underway following the trust’s formation from the July 2022 merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust.

Divesting Mapletree Anson – a relatively small asset in its Singapore portfolio relative to VivoCity mall and Mapletree Business City – would enable MPACT to channel the sale proceeds into a higher-yielding asset, probably outside Singapore.

As for Keppel, market players say it has been the group’s intention to sell half the new project at Hoe Chiang Road for some time now. This befits Keppel’s asset-light strategy.

QIA – cash-flush as it is – may be looking to recycle capital by selling that half stake in Asia Square T1. The 43-storey tower, housing mainly offices, is about 95 per cent occupied. Major tenants include Citibank, online marketplace Amazon and insurer Marsh.
Property and price details

The price MPACT is said to be eyeing for Mapletree Anson works out to S$2,670 per square foot (psf) on net lettable area (NLA) of 329,487 square feet. The building is on a site with 99-year leasehold tenure from October 2007, leaving a balance of nearly 83.5 years.

Based on the current rental income from the building, the net yield works out to 3.1 per cent. In comparison, Twenty Anson – located just across the road and which has similar land tenure – delivered a 2.9 per cent yield for investment firm KKR, which paid S$2,900 psf for it last year.

QIA’s Asia Square T1 is also on a site with 83.5 years left on its lease. The indicative price is understood to be about S$3,100 psf. A market observer estimated the net yield at 3.25 per cent to 3.5 per cent.

By geographical proximity and land tenure, a possible benchmark price is the S$3,170 psf paid by a special-purpose vehicle managed by Allianz Real Estate for a half stake in OUE Bayfront in early 2021.

At the time, that site had about 86 years left on its lease. The net yield for the transacted price was 3.6 per cent.

Office watchers reckon Keppel may be aiming for S$3,500 psf for Keppel South Central. In June last year, the 999-year leasehold Income At Raffles – located at 16 Collyer Quay, near Raffles Place MRT – was sold at S$3,617 psf.

The buyer, a locally incorporated company called Bright Ruby Resources, controlled by Chinese businessman Du Shuanghua, paid a total of S$1 billion in an all-cash deal. The net yield was 2.1 per cent. The 37-storey building has since been renamed Collyer Quay Centre.
Negative carry

Institutional buyers such as pension funds, insurance companies and private equity firms typically take on some gearing to fund commercial property purchases. The sharp rise in interest rates over the past year or so has therefore been a major hurdle for transactions.

Some seasoned market watchers say that institutional investors were still able to borrow at about 1.5 per cent as recently as January last year. At the time, office net yields were around 3 per cent.

By late-2022, however, borrowing costs had shot up to between 4.5 per cent and 5 per cent. They remain high. To make office yields attractive, property prices have to come down.

Said one seasoned analyst: “Last year, institutional investors were prepared to buy office buildings at 3 per cent to 3.25 per cent net yield. Today, to interest these buyers may require a 50-basis-point expansion in the property yield – to 3.5 per cent to 3.75 per cent. Will sellers agree to this?”

It is a different story for smaller freehold office assets, which are changing hands at all-time highs.

In April this year, the penthouse office floor at the 20-storey freehold Solitaire on Cecil project sold for S$4,325 psf – a record price for a full-floor space in a strata-titled office building here.

Buyers of strata office floors in the project included Asian ultra-high-net-worth individuals and family offices. These buyers may not need any borrowings for their purchase; their primary motivation is wealth preservation.

In the face of low yields for offices, institutional investors with allocation for Singapore real estate could be persuaded to look at retail or industrial (especially logistics) properties here.

Entry yields for retail properties are between 4.5 per cent and 5 per cent. For logistics buildings with 20 to 30 years left on the site lease, one could get an entry yield of 6.5 per cent to 7.5 per cent.

Logistics properties are particularly attractive because e-commerce is still flourishing and there is a lack of supply. Singapore has a significant manufacturing base to support the logistics sector. Prices in this space have also softened slightly, and assets are more bite-sized: typically S$50 million to S$200 million.

An additional challenge for institutional investors is obtaining approval for office purchases. The members of their investment committees (ICs) are mostly based in North America and Europe, where the work-from-home culture has had a severe impact on leasing demand.

In the US, for instance, there have been cases of tenants not renewing leases, and office-building owners handing the keys to the bank. IC members thus tend to be cautious – even nervous – about office acquisitions.

Singapore office building owners may have sound reasons for wanting to sell their properties. However, the market seems to be in a phase of repricing. Those who do not need to sell at this time may stay away from the market and return when interest rates are lower, and sentiment is better.

There will, however, be owners who prefer to sell sooner and put the proceeds to better use. A transaction at this time could call the bottom on larger office buildings and spur other owners – including Singapore Exchange-listed companies with plans to monetise office assets here – to spring into action.