Singapore office

SINGAPORE (Nov 10): The depressed office property market appears to be turning a corner, after the Central Boulevard white site tender saw keen interest from property developers.

The site has a potential gross floor area of 1.52 million sq ft for commercial use, and the highest bid came from IOI Properties at S$2.6 million (RM7.9 million) or S$1,689 psf.

According to DBS Group Research analyst Mervin Song, the winning bid was higher than S$1,409 psf paid by Macquarie for the Asia Square 1 site in 2007, and “signals confidence on outlook for the Singapore office market”.

In fact, Song noted that IOI Properties’ bid was not the only bullish one. The bids by developers with extensive experience in Singapore including Mapletree, CapitaLand, Hongkong Land and Cheung Kong, were in the range of S$2,500 psf and S$2,900 psf and indicated that they “remain bullish on the Singapore office market”.

The bids were also “consistent with recent market transactions including purchases made by sovereign wealth funds and existing valuation of various properties owned by the office REITs”, he added.

In a note on Wednesday, Song estimates the Central Boulevard white site could breakeven at between S$2,780 and S$2,942 psf of net lettable area, assuming the developers choose to build a premium grade A office tower with 5,000 sqm of retail GFA.

That would translate into gross development values of between S$3,090 to S$3,275 psf for office spaces, assuming a 10% development margin.

At the same time, Song believes office real estate investment trusts have been undervalued of late, given the competitive bids made by developers who manage various SREITs.

“The Singapore portfolios of various office SREITs are trading at an implied price per sqft (by NLA) of between S$1,900-S$2,450. This is significantly below the S$3,000 per sqft implied from IOI Properties’ bid and replacement costs of c.S$2,800 per sq ft,” said Song.

To that end, the brokerage maintained its “overweight” rating on the sector.

DBS’s top pick from the sector is Keppel REIT, given its smallest tenancy risk among the office SREITs. Keppel REIT has no leases up for renewal in 2016, and just 5% expiring in 2017.

“In addition, its Singapore office portfolio which is the most comparable to buildings in recent market transactions and the proposed office block on the Central Boulevard site trades at substantial discount, at an implied price of S$2,450 psf,” concludes Song.

Units of Keppel REIT are trading at S$1.08. —

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