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City&Country: Offshore-- Office deals pick up pace

There’s been intense speculation in Singapore on the next office deal. Tongues are wagging that The Corporate Office at 138 Robinson Road, a 21-storey office building at the corner of Robinson Road and McCallum Street, is close to being sold for more than S$200 million (RM473.1 million), or about S$1,900 psf of net lettable area (NLA). “The reason investors are interested in this building is because of its prominent frontage, asset enhancement opportunity from the unused plot ratio of up to 11.2, and also the potential for redevelopment into a resi­dential project, very much like Chow House next door,” says a source who declined to be named.

The buyer is believed to be a Singapore private investor, and the vendor is listed property giant City Developments Ltd (CDL), which owns 99% of the building. According to the group’s 2009 annual report, The Corporate Office is of freehold tenure and sits on a site area of 16,038 sq ft, with an NLA  of 10,210 sq m (109,100 sq ft). DTZ is believed to have brokered the deal, which when sealed, could bump up total office building transactions year-to-date to almost S$2.8 billion — 80% higher than the S$1.55 billion in total commercial investment deals recorded for the whole of 2009.

The first quarter of 2010 was dominated by relatively bite-sized deals of S$100 million to S$200 million, for instance, CapitaCommercial Trust (CCT)’s sale of Robinson Point for S$203.25 million (S$1,527 psf of NLA) to AEW Asia; the sale of 1 Finlayson Green two doors away for S$145 million (S$1,629 psf of NLA) to Singapore-based private equity group Lucrum Capital; and the sale of Marina House for S$148 million (S$1,138 psf of NLA) in March to a consortium of boutique developers led by listed Roxy-Pacific Holdings.
A languishing sector early last year, the office market is now starting to look enticing to investors.

Eighteen months ago, when the market was terribly weak because of the global financial crisis, the only players were the likes of private equity investment firms, high-net-worth investors and Asian family offices. “They had a bit more cash, good relationships with their banks and were comfortable to invest then,” says Jeremy Lake, executive director of investment properties at CB Richard Ellis Singapore (CBRE).

With banks and financial institutions in a post-crisis expansion mode, demand for Grade-A office space has racheted up. Grade-A office rents in the CBD increased 2.6% in 2Q2010 to almost S$8 psf a month, after six consecutive quarters of declines. As at 3Q2010, on the back of growing business confidence, average rents in Raffles Place have increased some 17.8% since 4Q2009 to S$8.07 psf, with average occupancy at 97.4%. “The general sentiment in the Singapore office market has been optimistic,” says Calvin Yeo, executive director of office services at Colliers International, in a statement recently. “We are seeing rents pushing towards double-digit level.”

altImproving rents also led to increased investor appetite, with the largest office deals transacted in 3Q. For instance, Frasers Centrepoint Ltd, the property arm of listed beverage group Fraser and Neave, purchased Starhub Centre on Cuppage Road from CCT for S$380 million (S$1,356 psf of NLA) in July. This was followed by Overseas Union Enterprise’s (OUE) announcement in August that it had purchased DBS Towers 1 and 2 at Shenton Way for S$870.5 million (S$986 psf) in what is considered the largest office building transaction this year. Then, just last month, Deka Immobilien, the property investment fund manager of Germany’s state-owned savings bank, Dekabank, purchased Chevron House in Raffles Place for S$547 million (S$2,080 psf) from a Goldman Sachs real estate fund (see table).

All three deals were brokered by Lake. The latest tally shows that he has closed S$1.9 billion worth of office deals this year, which translates to 74% of the S$2.58 billion total year-to-date.

The sale of four strata levels of Grade-A office space at Samsung Hub for S$111.42 million (S$2,125 psf) by listed property developer Ho Bee Investments to Sun Venture Invesco Pte Ltd was also brokered by Lake. In July, Sun Venture Invesco had purchased a row of conservation shophouses from 112 to 116 Amoy Street for S$24.5 million from Guthrie GTS Ltd.

The recent deal sizes involving office buildings are certainly a reflection of the strength of the recovery in that sector. “Quite a few of the investors who are back in the market have seen the previous cycle, when office rental rates shot up significantly from 2006 to 2008, and recognise the similarity,” says Lake. “While it may not be as dramatic as it was before, it’s certainly still meaningful and they realise now is the time to enter [the market].”

Raffles Place office rents jumped 158.5% to hit a record-high of S$17.89 psf per month from 3Q2006 to 3Q2008, according to a Colliers report. This was followed by an acute downturn caused by the global financial crisis that saw rents plunge 61.7% to S$6.85 psf per month in 1Q2010.

South Koreans could join the party
In the next 12 months, with the foreign property funds and domestic RE­ITs back on the hunt, the playing field is getting a little more crowded. “With prices moving up, returns are also a little lower, so the Asian private player is no longer dominant,” says Lake. “But there are still players who would wish to invest in Singapore and, to a greater or lesser extent, I would expect this to continue — whether in the residential, office, retail or hotel sector or in development sites in a joint venture [JV] with a developer.”

Asian private investors include those from Singapore, Hong Kong, Indonesia, Malaysia and mainland China. “The new money in terms of buying buildings will likely be institutional investors from South Korea,” Sreckons Lake. South Korea’s National Pension Service, the world’s fourth-largest pension fund, for instance, bought HSBC’s Canary Wharf headquarters for £773 million (RM979.5 million) last year, and had also taken a 12% stake in the UK’s Gatwick airport this year. In January, the pension fund announced the purchase of an office building in Sydney. International property is said to comprise less than 1% of the South Korean pension fund’s portfolio, and the fund is said to be rapidly boosting its exposure, especially in Europe, where slowing economic growth has pushed down valuations.

“And they [South Korean institutional investors] are also actively looking in Asia for diversification,” notes Lake. Singapore could certainly be on the radar, he thinks, but it would depend on opportunity and will be very much deal-driven. “You may well see in the next 12 months, one or two South Korean institutional investors in that core fund space.”

Core funds, as the name implies, are those focused on income-yielding assets, typically quality retail or office buildings that are highly tenanted and generate a steady rental income. The Frankfurt-based Deka is a classic example of a core fund, which explains its purchase of Chevron House. The 29-storey office building is 50% occupied by two blue-chip MNC tenants: US oil giant Chevron and credit card company Visa, while the rest of the building is leased to multiple tenants. So, while the new landlord will enjoy a predictable albeit slightly lower income from the two large occupants, there is room for rental growth from the other half of the building that is leased to multiple tenants, as many of the leases were signed at market rates.

While Chevron House’s office building is currently 98% occupied, its four-storey retail podium, which it shares with the adjoining Hitachi Tower, is 99% full. Rental rates for the retail podium are also said to be “very strong”, given the lunchtime crowd and the prime location. Based on the purchase price, the yield is said to be just under 4%. However, there is prospect of a yield upside when rental rates are reset.

“Typically, for most property funds, their first investment in any market will not be this large,” says Lake. “But due to the limited deal flow and a strong desire to get into the Singapore market, they [Deka] were flexible enough to consider something that’s larger than what they would normally invest in.”

Market watchers are betting that with the sale of Chevron House, it’s just a matter of time before Hitachi Tower, situated directly behind the former, will also be on the market. This is because the same Goldman Sachs property funds that purchased Chevron House in late 2007 for S$730 million (S$2,780 psf) had also bought Hitachi Tower in early 2008 for $811 million, or about S$2,900 psf. The Goldman Sachs funds’ maiden office building purchase was DBS Towers, bought in late 2005 for S$690 million (S$780 psf)and sold to OUE for S$870.5 million.

There are quite a large number of property funds actively looking around, with German funds most prominent in the commercial space, and they include SEB, which joined the consortium of investors formed by Pua Seck Guan’s Perennial Real Estate to purchase Chinatown Point in July; Union Investment Real Estate, which purchased the VisionCrest commercial development in early 2007; and Commerz Real, which bought 71 Robinson Road (the newly completed office building located across the street from The Corporate Office) in April 2008.

Increased interest from European funds
While Deka has been eyeing Singapore for some years, this is its first acquisition. “Deka’s team is based in Frankfurt,” notes Lake. “They would fly in and fly out, and work very closely with consultants in the various markets to assist them to get the deals done.” Lake has been working with Deka for a decade, helping them source for assets in the region.

According to Richard Marriott, partner of EC Harris, European funds have increased their allocations for Asia and are increasingly active in the region. “A lot of them aren’t based in Asia,” says the Singapore-based Marriott, “and yet they are still looking to increase their allocation. They recognise the growth potential of the Asian market in the face of a much flatter market in Europe, particularly in the UK.”
The three main markets that these funds have been looking at consistently in the last six to 12 months are Australia, Japan and China. “They see markets such as Singapore and Hong Kong as more opportunistic plays,” says Marriott. The funds are interested in Australia because of its strong economic fundamentals from raw materials such as mining, and the transparency of the Australian property market. The focus in Australia is mainly in the office space.

Japan sees continued investor interest because of the opportunity for capital growth. With inefficiencies in how buildings are operated, funds, therefore, see opportunity to drive value through active asset management. Interest is centred mainly on the commercial sector — both retail and office buildings, says Marriott.

In China, the problem that funds encounter is not just finding the right deal, but also a JV partner if they go into devlopment. “A lot of these funds aren’t developers, so they need to rely on the expertise of their JV partner to succeed,” says Marriott. Not only are the funds doing due diligence on the asset they plan to buy, but they are increasingly reliant on the likes of EC Harris to carry out due diligence on the JV partner to find out whether the partner is capable of delivering. “That, to me, is the headline issue in China,” he says. In China, the funds are more interested in retail and residential and less in commercial space, adds Marriott. “Retail and residential are the two key markets.”

In Singapore, the interesting point is that investors who can find off-market deals are obviously going to drive the most value, observes Marriott. “Those investors who know how to optimise the performance of an asset, in terms of repositioning it and seeing where they can derive value, will have an edge over those that are really just buying at the market price.”

Generally, these funds are looking at 4% to 5% yield for office properties, and higher for retail. Some of these foreign funds have been zooming in on retail properties in Singapore. “About US$200 million [RM618.8 million] is the typical deal size that these funds are looking at,” Marriott says. “Development projects are likely to be perceived as more high-risk at the moment,” he adds.

Even though CBRE’s Lake has handled the three largest office deals in Singapore this year, he doesn’t expect to see a billion-dollar transaction happening this year. “Once you cross S$500 million, the pool of buyers shrinks substantially. One of the lingering features of the global financial crisis is that there’s still a fear factor and a bit of caution about doing deals that are too big,” he says.

Cecilia Chow is editor of City & Country at The Edge Singapore

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 828, Oct 18-24, 2010

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