City&Country: Offshore-- Hot demand for strata office space

Owners of prime Grade-A office buildings in the Singapore CBD contemplating a sale these days are in an ebullient mood. Just 12 months ago, they were staring at capital values that had plunged 31% from the last peak in 2Q2008 while rental rates had nose­dived 52.8% from two years ago. Prime monthly rents in 3Q, however, jumped 7.2% q-o-q, from S$6.90 to S$7.40 psf, which was the biggest jump recorded since end-2007, according to CBRE in a report dated Nov 18.

Demand came mainly from financial institutions, insurance firms and professional business services companies. Major leasing deals were primarily focused on the new Grade-A developments, but net absorption was 1.2 million sq ft — the largest such figure recorded since 2000, says Moray Armstrong, executive director of office services at CBRE.

“I firmly believe the commercial sector has staying power,” says Donald Han, the newly appointed vice-chairman of Cushman & Wakefield, “because you’re buying into office properties where the promise of rental upside is very compelling, expected to be above S$10 psf per month by next year.”

Hoping to ride the upswing in the office market, local and foreign high net worth individuals, family offices and boutique funds have been actively scouring for commercial property investment deals. The opportunities for “bite-sized” deals of S$10 million to S$30 million in the commercial market are, however, rarer compared with the residential market, concedes Han.

Unlike Hong Kong, Singapore has a limited stock of strata office space, observes Dennis Yeo, managing director of Singapore and head of regional industrial group at Colliers International. “In Singapore, there’s still room for price growth in prime office space as prices are still some 25% below the previous peak, whereas in Hong Kong, prices of office space are already close to the last peak.”

Active trading
In Singapore’s CBD, buildings with strata office space available for sale include the 30-storey Grade-A Samsung Hub at the corner of Church Street and Telok Ayer Street; and 6 Raffles Quay (the former John Hancock Tower). Over at Cecil Street, there is Tong Eng Building, The Octagon, and GB Building. Meanwhile, on Anson Road in the Tanjong Pagar neighbourhood, there is Springleaf Tower and International Plaza, where there has been active trading. In October, three units at the 99-year leasehold International Plaza changed hands at S$1,400 to S$1,507 psf.

At Springleaf Tower, considered a Grade-A office building with a 99-year leasehold tenure, an entire strata floor of 10,742 sq ft on the 23rd level of the building was sold for S$14.38 million (S$1,339 psf), according to a caveat lodged with URA in February. The same unit changed hands in September for S$17.9 million, or S$1,666 psf, which is a 24.4% capital gain in just seven months.

As for Grade-A strata office space in the core CBD, Samsung Hub has also seen a surge in activity in recent months, with transactions crossing the S$2,000 psf threshold. In August, listed niche developer Ho Bee Investments reported that it had sold four floors of office space at Samsung Hub for S$111.4 million, or S$2,125 psf, to Sun Venture Invesco.

There has also been activity at the 99-year leasehold GB Building, a 26-storey office building at the corner of Cecil Street and McCallum Street. Insurance giant AXA had put up for sale the four topmost floors with a total strata area of 21,560 sq ft. The space fetched S$30.5 million (S$1,415 psf), according to a caveat lodged at end-August. The buyer is said to be a Singaporean. Most recently, a strata-titled unit of 5,425 sq ft on the 14th level of the building was sold for S$7.87 million, or S$1,450 psf, in October, while a unit of equivalent size on the 16th level was sold for S$1,405 psf in September.

The most recent transaction of a strata office unit at The Octagon, a freehold office building standing at the corner of Cecil Street and Boon Tat Street, took place in May when a unit on the sixth level changed hands at S$2.66 million, or S$1,396 psf. Jones Lang LaSalle (JLL) is marketing a unit on the 21st level of the building with an asking price of S$1,650 to S$1,700 psf.
Along Shenton Way, a 560 sq ft strata office unit on the 10th floor of the 99-year leasehold Shenton House at Shenton Way changed hands at S$868,500, or S$1,552 psf, last month. In September, a 15th floor unit was sold for S$773,824, or S$1,712 psf.

However, the likes of Shenton House, Tong Eng Building, and The Octagon are considered Grade-B, and the frequency of trading activity in such buildings is limited, notes Stella Hoh, head of investments at JLL.

The most sought-after office complex in the Grade-A office space by far is Suntec City, located in Marina Centre. The two most recent transactions there were for a 30th floor office unit that changed hands for S$2,333 psf in October, and a 40th floor unit that was sold for S$2,450 psf in September, according to caveats lodged with URA.

One Finlayson Green a potential strata sale
Seeing the strong demand and limited supply of strata office space, Singapore-based private equity group, Lucrum Capital has put One Finlayson Green on the market by expressions of interest. It has also received in principal approval to sub-divide the 15 floors of office space in the building into 15 individual strata titles.

“The strata-title process was part of the fund’s asset-management strategy to unlock the value of the property,” says David Batchelor, one of the founding partners and director of Lucrum Capital. “Even though we’re going through the strata-title process, we still have the option to sell all 15 strata titles to one buyer or to 15 different buyers.”

The group had purchased the 19-storey One Finlayson Green freehold office tower for S$145 million (S$1,630 psf) in March from UK-based property fund, Develica, which had purchased the building in mid-2007 for S$231 million, or S$2,650 psf, from the Hong Leong Group.

Lucrum Capital was set up a year ago by four partners including Batchelor, who was previously with JLL’s investment team, and specialised in Good Class Bungalows; Indonesian private investor Norman Winata, who also holds and manages a portfolio of apartments at The Sail; Wee Sing An, formerly a director at Credo Real Estate; and Kareen Kan, who was previously an independent advisor to a privately-held property investment company. The chairman, Wong Ah Long, is a veteran in the property business. He was previously CEO of Suntec City, and also played an instrumental role in growing the China business while at Pacific Star.

While there is interest from institutional investors to buy One Finlayson Green en bloc, sub-dividing the building and selling individual strata-titled floors will mean exposing the building to a wider spectrum of buyers, including business occupiers, says JLL’s Hoh. On a per floor basis, the indicative price is said to be S$2,600 to S$2,800 psf. The estimated average floor plate of the building is 6,437 sq ft, and the total saleable area is 96,132 sq ft.

The major attribute of the building is not just its location on the edge of the prime Raffles Place financial district in the CBD core, but also its accessibility to the Raffles Place MRT station right next to it. “What’s more, it is a good-quality building with a prestigious address — ideal for business occupiers looking for a prime location,” says Colliers’ Yeo. “The other thing is scarcity — there are very few Grade-A quality office buildings in the core CBD that offer freehold strata-titled space for sale.”

About S$3 million has been spent over the last three years to upgrade the building including the façade, lift lobby, common areas, as well as mechanical and electrical facilities. “The new owner won’t need to do any more asset-enhancement works, so it’s like buying a brand new building,” says JLL’s Hoh.

Buyers of strata office space at One Finlayson Green will also be able to look forward to future rental upside. The building’s current average passing rent is above S$8 psf per month.  About 40% of the building’s space will be up for renewal next year, says Batchelor, and recent lease renewals have been done at S$9.80 psf per month. “We are expecting rental rates for next year to move positively from the current levels.”

Cecilia Chow is City and Country editor at The Edge Singapore

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 835, Dec 6-12, 2010