Teo Hong Lim, executive chairman and CEO of niche-property group, Roxy-Pacific Holdings in Singapore, is in an enviable position and a classic example of a developer looking to top up its land bank given the spate of strong new-home sales for its projects. The developer has launched and fully sold nine residential projects in the past year.
The last units of Roxy-Pacific’s Nova 48 and Nova 88 projects, located off Balestier Road were sold last month. The two projects which are adjacent to each other achieved an average price of S$850 (RM2,040) psf to S$880 psf. “We have launched and sold [our projects] too fast, we’re nearly out of stock already,” laments Teo. “For the last six months, I have been looking for sites everywhere.”
The boon is that he has around S$315 million in pre-sales that will be progressively recognised over the next two financial years from FY2009 to FY2011. “In the meantime, we will look for land where we feel we can make money even at today’s prices,” says Teo. “We don’t bet on future assumptions or price expectations, especially when we’re still in a recession and the outlook is still rather fuzzy.”
Last month, Teo snapped up all 37 freehold retail units at Kovan Centre in an enbloc purchase for S$22.2 million or approximately S$540 psf. “We’ve been looking around for alternative investments, and not just for residential sites,” says Teo. “The Roxy style is to never overpay for sites. We’re very price and location driven.”
Architects have been engaged to submit proposals for the building and, in the meantime, Teo and his team are busy studying the existing tenancies to see how they can enhance the asset. The retail floors of Kovan Centre occupy the first two levels of the four-storey development. The upper floors house apartments. The second level is made up mainly of schools and tuition centres, and the rental rates are currently in the S$3-psf-per-month range, says Teo. Hence, any asset-enhancement exercise would be at the second level. The two main occupiers on the first level are a food centre and a Shop N Save supermarket.
Trawling the investment market
Roxy-Pacific fits the profile of niche developers trawling for deals in the property market today. Others include Fragrance Group, as well as World Class Venture, the property arm of jewellery group, Aspial Corp. Fragrance has been the most active, snapping up sites since late last year. It most recently won the bid for the Short Street hotel site for S$15.5 million or S$353 psf ppr last month in a government land tender. It also snapped up a 26,130 sq ft freehold site at Balestier Road for S$29.8 million.
Meanwhile, World Class Venture picked up a row of shophouses on East Coast Road for S$10.6 million and a site on Dunearn Road for S$6.9 million.
Joint-venture partners, Yi Kai Development and Fission Group, which successfully launched and fully sold the 293-unit [email protected] back in mid-February, have reportedly snapped up three old office buildings in the Central Business District (CBD) to be redeveloped into residential projects in the past month.
Other buyers who have been active in the market are Asian investors, typically cash-rich families or groups of high-net-worth individuals.
Tracking deals above S$5 million, CB Richard Ellis (CBRE) reports that investment sales for 2Q2009 totalled S$953.9 million, a good 3.5 times higher than the S$273.8 million achieved in 1Q2009. The bulk of the deals were in the residential sector (63.5%), with 14 Good Class Bungalow transactions in the quarter, a marked improvement from just three in 1Q2009.
Both the residential sector and office buildings with bite-sized deals of under S$100 million have seen the strongest interest among the Asian investors, notes Jeremy Lake, CBRE’s executive director of investment properties. “These Asian private investors who are the first movers in the Singapore investment market deem that the current prices, which reflects a 35% discount from the peak, is an attractive level to enter,” says Lake. “This profile of buyers tend to be more capital driven and are not so focused on IRR [internal rate of returns],” he adds.
However, while such transactions in the office market are attracting more buyers, there are perhaps fewer such buildings on the market now, says Lake.
“The strata residential or commercial buildings that needed to be sold have already been sold,” says Donald Han, regional managing director of capital markets at Cushman & Wakefield.
In the past month or so, in light of the more positive sentiment and pick up in market activity, there is now a gap of around 5% to 10% between asking and selling prices, as sellers have now started to raise their prices, notes Han. “So, in the next month or so, you may start to see buyers starting to hold back.”
With potential sellers in the private sector holding out for higher prices, attention will then turn to the government-land sites on the reserve list, reckons Han. Active bidding might be an indication of this, he adds.
The other source of private-sector land is collective sales, but it could take a while to materialise. “The first developer to inquire about land for sale was about four to six weeks ago, and the first owner who asked me about the possibility of a collective sale was about a fortnight ago, so it’s pretty much an emerging market,” says Lake. “The big question is of course, in order to have a market, the buyers and sellers need to agree on a price.”
Inactive foreign institutional players
While private Asian investors are playing in the under-S$100 million league, foreign institutional investors who were active in 2006 to early 2009 are now largely “inactive” in Singapore. That accounts for the dearth of transactions in the investment market.
“There are still funds with cash and funds that are raising cash,” says Hong Kong-based Chris Marriott, CEO of Southeast Asia for Savills. The markets that are most intriguing to the funds are probably Australia, Japan and South Korea. “Outside of that, they are looking for long-term returns, as opposed to more opportunistic acquisitions, and that means longer leases with guaranteed income returns for them to create cornerstones for their portfolio,” says Marriott.
“If you’re now talking about an asset with a 4% yield, it becomes more difficult for these international funds to justify putting such assets into a fund,” continues Marriott. “Unlike local investors who are looking at capital appreciation, these institutional players are looking for recurrent rental income.”
Roxy-Pacific, for instance, has a current net yield of 4.2% per annum after maintenance and tax for the Kovan Centre retail space. Meanwhile, its financing cost is around 3%. In the announcement on the purchase the company had said that it was buying the property to improve its current rental income, with the possibility of selling the property “at the appropriate time”. The completion of the deal is expected to be in 3Q2009. According to Teo, selling the property is something “that we can decide on later”.
Some analysts and property consultants are reckoning that the rally has been too swift and therefore unsustainable. “Our outlook for the investment market remains cautiously optimistic,” says Chua Yang Liang, head of research for Jones Lang LaSalle, in a report last month. “Without a full recovery in the general economy, investors’ purchasing appetite is expected to remain lukewarm and bite-sized assets will be favoured, especially discounted assets with strong reversionary potential, long-term anchor tenants and potential capital-value growth.”
However, Savills’ Marriott is a little more sanguine. “If it’s hot money coming from overseas, I might be a little bit more nervous on the sustainability,” he says. “What we’re seeing is that people see fair value, and are entering the market now that the opportunity exists, so it reflects real demand as opposed to speculative demand.”
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 763, July 13-19, 2009
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