City&Country: Offshore-- Singapore CBD office buildings in hot demand

Activity in downtown Sing­apore is certainly picking up, and the busiest street appears to be Robinson Road. A sale by expression of interest for 108 Robinson Road (formerly GMG Building) closed on Dec 16. Refurbished two years ago, the 12-storey office building is said to have a price tag of S$110 million, or S$2,000 to S$2,100 psf, based on the strata floor area. The marketing agent for the property is said to be DTZ. According to sources, at least four parties, two of whom were foreign high-net-worth individuals, had expressed interest in the building.

“The new owner can wait for capital values to appreciate, and exit via strata whole floor sales like at One Finlayson Green,” says a source. This is because the building at 108 Robinson Road has already been sub-divided into strata-titled floors.

The 19-storey office building, One Finlayson Green, located next to the entrance of the Raffles Place MRT station, was purchased by private equity fund Lucrum Capital in March last year for S$145 million, or S$1,630 psf, based on net lettable area (NLA). The freehold property is now back on the market for whole floor strata sale, with prices pegged at an average of S$2,400 to S$2,800 psf. Interest in the property is said to be strong and coming from investors and business occupiers, given the location and prestigious address. The marketing agent for the building in North Asia is Colliers International, and Jones Lang LaSalle (JLL) is the marketing agent for Singapore and Southeast Asia.

Just two doors away from 108 Robinson is 112 Robinson (formerly HB Robinson). Market sources say the 14-storey office building is on the market with an indicative price of S$175 million, or S$1,900 psf, based on NLA. The sole marketing agent for the property is said to be CB Richard Ellis (CBRE).

“Many investors are focused on the CBD at present,” says Chris Archibold, international director, head of markets, at JLL. “The majority of transactions we are seeing are either older Grade-B or Grade-C buildings for residential conversion or core prime Grade-A assets.”  

Best use is commercial
Generally, investors view an asset based on the highest and best use of the property. Thus, investment decisions will be a function of factors such as market dynamics, land price, construction cost, remaining lease tenure and ability to top up the lease on the land, location and the presence of any unused plot ratio, explains Archibold. “The current office market dynamics would cause investors to seriously consider office space as a use,” he adds.

Shaun Poh, senior director of investment advisory services at DTZ, agrees. Asking prices of office property in the CBD area are now at S$2,000 psf and above compared with S$1,500 to S$1,600 psf at the start of 2010. “The increase was in part fuelled by the conversion potential to residential use,” he says. “My gut feel is that next year, there won’t be a lot of conversion plays as prices of commercial property have almost caught up with residential prices, and conversion of older office buildings to residential may not be as readily approved by the authorities.”

And that is already happening. The consortium that purchased Marina House at 70 Shenton Way has reportedly increased the ratio of the commercial component of its new building to 60%. The UIC Building will also be redeveloped into a mixed-use development with 60% residential and 40% commercial space.

For much of the past 12 months, residential prices in the CBD had been higher than prices of office space, resulting in the “best use” conversion from office to residential. An example of this is Hong Leong’s 76 Shenton Way, an office building launched at end-March as a residential tower. All units were snapped up on the first day of private previews at prices averaging S$2,200 psf, with high-floor units hitting S$2,600 psf.

Another example is the former VTB Building, purchased in June 2009 for a reported S$71 million, or 1,061 psf per plot ratio (ppr) based on a plot ratio of 11.2. It had obtained approval for conversion into residential, and was launched as the 167-unit, 42-storey Robinson Suites in early December. Units were sold at S$2,600 to S$3,300 psf.

These prices are pegged to those achieved at the waterfront residential towers in Marina Bay. For instance, at The Sail@Marina Bay, the highest price psf achieved this year was S$3,263 in May for a 58th floor, two-bedroom unit that sold for S$2.88 million. The most recent transaction, according to a caveat lodged in early December, was for a 27th floor studio apartment that changed hands at S$1.5 million, or S$2,450 psf. At Marina Bay Residences, a 1,959 sq ft unit on the 46th level was sold for a record S$3,790 psf in September. The most recent recorded transaction was for a fifth level unit that was sold for S$3 million, or S$3,063 psf, in mid-November.  

Conversion to residential still an ‘ongoing trend’
With the recent strong sales seen at Robinson Suites, there is speculation that City Developments Ltd (CDL), which owns the 23-storey office building City House next door, could be looking at the possibility of redeveloping it into a residential tower.

As inner-city living gains traction, conversion of office buildings to residential in the CBD “is a trend that’s still ongoing”, notes Jeremy Lake, exe-

cutive director of investment property at CBRE. “As the trend continues, it will have an impact on the office market in that the stock of office space will diminish as old buildings are knocked down and replaced by new residential towers.”

In Tanjong Pagar, Keppel Land announced in October that Keppel Towers and GE Tower on Hoe Chiang Road will be redeveloped into two high-rise residential towers with 620 apartments and commercial space on the first few levels.

Along Robinson Road, Chow House, which was sold in August for just over S$100 million, has already obtained outline planning permission for redevelopment into residential use. The neighbouring Corporate Office sitting at the corner of Robinson Road and McCallum Street that was sold for S$215 million (S$1,965 psf based on NLA) could be redeveloped into a commercial building, and sub-divided into smaller units for sale. “It is freehold, and the location is good,” says a source. “It will be ideal for smaller investors who want to purchase strata office space.”

With offices competing for the highest and best use, and with residential properties as well as hotels coming up in the CBD, “it is becoming a more lively environment”, says Donald Han, vice-chairman for Cushman & Wakefield.

Han is optimistic, however, about the commercial market. “I firmly believe that commercial property has staying power,” he says. “People may be buying office space at 3% to 4% rental yields today, but it is on the promise of future rental upside, with rents possibly going beyond $10 psf. As for residential properties in the CBD, the promise of such rental upside is less likely.”

Local office outlook ‘very good’
The new Grade-A developments such as Asia Square, 50 Collyer Quay and Ocean Financial Centre have substantially increased their occupancy rates over the last six months and are seeing a lot of interest for their remaining space, says Archibold. At Asia Square Tower 1, half the space has already been spoken for, while 60% of office space at OUE Bayfront has already been pre-leased. Ocean Financial Centre’s take-up rate has hit 70%, while One Raffles Place Tower 2’s is 10%.

To compete with their gleaming new neighbours, existing landmark office buildings at Raffles Place are also undergoing a nip and tuck. At Republic Plaza, the car park, car park lift lobbies and washrooms were upgraded, while new security turnstiles were installed. At 6 Battery Road, a major upgrading programme is already underway that includes the common areas, washrooms and tenanted areas.

Office rents have bottomed out, with a 2.6% increase in 2Q and another 9.1% in 3Q, according to JLL’s Archibold. As for 4Q, he expects a 6% to 7% increase in rental rates. While 2011 will likely see vacancy rates increase with a number of buildings being completed, “we do not think this is likely to cause any downward movement in rents. More likely, it will result in more modest rental growth”, he adds. “As the new supply gets taken up, rentals may increase at a faster rate in 2H2011 and 1H2012.”

As the outlook for Singapore’s office market is “very good”, says Archibold, “we do expect to see further interest from investors wishing to acquire real estate assets here. The consensus is that the office market is picking up; therefore at present, there are generally more buyers in the market than owners wishing to sell.” 

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 839, Jan 3-9, 2011