THE retro-style building at 2 Havelock Road is a recognisable landmark for many who emerge from the tunnel of the Central Expressway just before entering the CBD. Although the building's façade has been refreshed, with interiors completely revamped and updated four years ago, the distinctive, tiered structure remains unchanged. And even though its name has been changed to 2HR, many still remember it by its former name, Apollo Centre.
The building 2HR changed hands last month in a deal that involved the sale of the company that owned the asset, AEW VIA Cayman 2. The company is in turn linked to AEW Value Investors Asia, a fund that invested in assets in Asia under Boston-headquartered US real estate investment firm, AEW Global.
The buyer of AEW VIA Cayman 2 is GOI Strategic Investments, a wholly-owned indirect Hong Kong subsidiary of Singapore listed engineering firm-turned-property group Guthrie GTS. GOI paid $167.6 million for all the shares in AEW VIA Cayman 2, and valued 2HR at $282.88 million. The commercial building still has 69 years remaining on its original 99-year lease with effect from 1983.
Like the sale of 2HR, most of the deals that were driving the investment market in the first few months of 2013 had been the sale of commercial property. "We will probably see more such non-residential deals this year," acknowledges Karamjit Singh, head of investments and residential at Jones Lang LaSalle (JLL). Incidentally, JLL and CBRE were joint marketing agents of 2HR, although the sale is said to have been brokered by CBRE.
The buyers of commercial properties, especially the listed Singapore property groups, are now formulating "new strategies in response to the changing circumstances", says Singh in a recent interview with City & Country. "There are still deals that need to be done. There are buyers with cash who still believe in the property story."
Appetite for residential property has faded with the recent round of property cooling measures imposed on Jan 12, which included a hike in Additional Buyer's Stamp Duty (ABSD) to 15% and reduced borrowing limit to 20% loan-to-value (LTV) ratio for corporate entities. Even the industrial sector was not spared, with Seller's Stamp Duty (SSD) imposed on those who sell within the first three years of purchase. Consequently, the commercial sector has seen strong interest from investors.
In the last two years, Guthrie GTS has emerged as a major player in commercial assets with purchases such as The Adelphi and Burlington Square in collaboration with Sun Venture, and sale of strata units in these developments. It also achieved success with Paya Lebar Square, a 99-year leasehold commercial site located next to the Paya Lebar MRT station, which Guthrie is developing jointly with Sun Venture and Low Keng Huat, and where prices crossed $2,000 psf.
However, Guthrie is believed to be adopting a long-term approach with 2HR. It is likely to carry out additional alteration works to increase the retail component of the property to 50%. Currently, office space at 2HR takes up 136,920 sq ft (or 78% of the total net lettable area) on the upper floors of the building, while the retail podium, which consists of the first two levels and the basement level, has a total NLA of 38,992 sq ft (22%).
If a critical mass of retail space can be achieved at 2HR, the new owner can enjoy enhanced gross rental rates of $10 psf per month, notes Ashish Manchharam, regional director of investments at JLL. 2HR is currently fully leased, with office space tenanted to multinational corporations such as Estée Lauder, DSM Nutritional Products and MOL Tankship Management and rental rates hovering around $7 psf per month, which is comparable to those of offices in the Tanjong Pagar area, points out Manchharam. Meanwhile, the retail space at 2HR is leased at rental rates of $8 psf to $9 psf per month.
On March 26, listed construction group, Chip Eng Seng Corp, announced that its wholly owned property arm, CEL Property Investment, had purchased all units of San Centre, an office building at Chin Swee Road near the Chinatown MRT station for $113 million. The deal, brokered by JLL, is considered to be the first en bloc purchase of a commercial property in 2013. The existing office building sits on a land area of 28,719 sq ft with a gross floor area (GFA) of 131,896 sq ft. Hence, the price works out to $857 psf ppr.
Built in the 1970s, the existing San Centre contains 107 strata-titled office units and 80 parking spaces. The site has a 99-year lease with effect from 1969, and has the potential to be redeveloped into a 20-storey commercial or mixed-use commercial property with a hotel development. The sale is subject to Strata Title Board approval.
"As the site of San Centre enjoys the flexibility of various redevelopment options, its tender attracted good interest from investors and developers," says JLL's Singh.
The latest acquisition of San Centre could see Chip Eng Seng replicating the success it had achieved at the launch of Alexandra Central next to IKEA on Alexandra Road. Launched for sale on Jan 21, a week after the seventh round of government property cooling measures were announced, all except one of the 115 units at the six-storey retail podium of Alexandra Central, which contains a mix of strata-titled shops and F&B units, were sold by balloting that first day. Prices were said to range from $4,000 to $8,000 psf. Sitting on top of the retail podium will be a 13-storey, 450-room, four-star hotel managed by Park Hotel Group.
Cooling speculation in micro strata retail units
However, the government has introduced minimum unit size for retail units in shopping malls and minimum corridor width in new developments, which came into effect on March 27. The minimum average size for retail units will be 50 sq m (or about 538 sq ft), while the corridor width will be between 2m and 2.4m for single loaded corridors, and between 2.4m and 3m for double loaded corridors.
"Small shops have a place in our retail landscape as they support our entrepreneurs and cater to certain trades, such as stationery shops, florists and moneychangers," said Khaw Boon Wan, Minister for National Development in his blog on March 26. "But when they are the predominant shop type in a shopping mall, we have to be concerned about the viability of these shops and the shopping experience of the customers. If these shops are not suitable for most retailers, then the developers' motive is probably to target individual property investors rather than genuine retailers. Who will the individual property investors sell or tenant to after the developers have sold these units to them?"
As such, developers will take into consideration this new minimum average unit size in their bid prices when tendering for sites, says Steven Ming, deputy managing director of Savills Singapore. "The minimum average size requirement will result in some dilution on the unit sale prices of new strata retail schemes, as projects can no longer be weighted heavily on smallish units," he explains. "As such, developers may moderate their bid prices for commercial sites to factor in this potential dilution."
Another listed property developer known for making shoebox apartments fashionable in Singapore is Oxley Holdings. The company was elevated to SGX Mainboard in February. The developer has 10 development projects in the pipeline, including mixed-use residential and commercial, as well as industrial space. Its latest foray is hospitality. Oxley announced on March 15 that it had been granted a conditional option to purchase the property of The Pines Club at Stevens Road for $318 million. The property will be sold with a lease of 103 years with effect from the day of the completion of the sale of the property.
The property sits on a land area of 198,886 sq ft and provisional permission was granted on Feb 27 for the proposed development of a mixed-use project made up of a twin eight-storey hotel block, a two-storey commercial building and a brand new four-storey clubhouse with basement. The Pines Club members will be able to use the new clubhouse facilities upon completion of the property, with construction expected to take two to three years. This is considered to be Oxley's maiden foray into the hospitality sector. According to sources, the deal is believed to have been struck between Oxley's executive chairman and CEO, Ching Chiat Kwong and Peter Kwee, the owner of The Pines Club, who paid just over $100 million for the property in 2002.
Meanwhile, given the strong interest in commercial property, some owners are also seeing this as a great opportunity to sell their property. For instance, AIA Building at 160 Changi Road was put up for sale by tender on Jan 25 by Savills Singapore. Owned by insurance giant AIA, the four-storey freehold office building was built in 1994, and had been occupied by the company until last year. The property has a site area of 17,974 sq ft, and a GFA of 54,208 sq ft. It can be redeveloped into a new mixed-use commercial property with strata-titled retail or office units, as well as for hotel use, subject to approval by the relevant authorities. No development charge will be incurred. The indicative price for the property is $62 million or $1,144 psf per plot ratio (ppr).
The tender for the property on Changi Road closed on March 8. "We fielded a lot of inquiries, and apart from developers looking at redeveloping the property for strata-titled unit sales, there were also various parties looking at the property as a long-term investment for recurring income and a fair number of end users," says Ming. He reckons that the property can achieve rental yields in the range of 3% to 3.5%.
Word on the street is that a listed property group has purchased the property at 160 Changi Road at a price above the original indication of $62 million.
Residential taking a breather?
It does not mean that there were no deals involving collective sales of residential sites. On March 25, JLL announced that Kismis Lodge located at Lorong Kismis within the Upper Bukit Timah residential enclave, was sold en bloc for $84.18 million or $1,198 psf ppr. The buyer is said to be Newfort Alliance (Cairnhill) Pte Ltd, which purchased Chateau Eliza en bloc for $92.2 million last September. The sale of Kismis Lodge marks the third residential collective sale this year.
The buyer is expected to redevelop the existing site into a new strata-titled landed housing development with 43 terraced houses or 32 semi-detached houses, according to Yong Choon Fah, JLL's national director of investments. "Despite the recent government cooling measures, the landed housing market, which is very niche, has remained stable and continues to see demand owing to its scarcity."
Last year, JLL brokered about $2.7 billion worth of investment sales (involving properties above $5 million). Of these, $2.1 billion were deals related to commercial assets, including the sale of NOL Building to Fragrance Group for $380 million, the sale of Twenty Anson office tower to CapitaCommercial Trust for $430 million, and the sale of a 50% stake in nex mall to Mercatus Co-operative Ltd, jointly held by the Singapore Labour Foundation, NTUC Income and NTUC Fairprice, for $825 million.
In 2012, when the ABSD of 10% was first imposed and LTV ratio for corporate entities were lowered to 50% and then 40% last October, for residential property purchases, investors and some listed property groups were already switching from residential to commercial or mixed-use properties. Last year, residential collective sales brokered by JLL (including deals done by Credo Real Estate prior to its merger with JLL last July) amounted to $675 million.
JLL's Singh, however, has a more bullish forecast for this year, with collective sales expected to more than double to $1.5 billion to $2 billion. This includes both residential and commercial collective sales, the likes of San Centre.
On the other hand, investors have turned cautious on bulk purchase of residential units following the latest government measures. In January, Savills put up for sale the 36 units owned by Kuwait Finance House at the luxury condo Goodwood Residence, a prime high-end condo developed by GuocoLand, which the fund had purchased in 2008. The units were recently offered for sale by expressions of interest with an indicative price of close to $180 million or an average of $2,450 psf.
Meanwhile, JLL has put up for sale the 34-unit Royal Oak Residence at 21 Anderson. The 10-storey freehold property has 34 units, with a strata area of 85,552 sq ft and a land area of 49,048 sq ft. The units are currently leased out. The property is owned by Ayala Group's private equity fund, Arch Capital, which purchased the asset in 2010 after the property had undergone an extensive refurbishment. The property was also put up for sale by expression of interest, which closed on Feb 28. The indicative price was $250 million to $260 million.
"Activity in the luxury residential market has come off quite substantially," concedes JLL's Singh. "At some point in time, both local high-net-worth investors and property funds may shift their focus. We're already seeing some deep-pocketed local investors focusing on the high-end segment, as they are beginning to see the gap in pricing between the high-end and mass-market condos narrowing. However, it's still early days."
In the meantime, investor interest continues to be strong in commercial buildings, which can either be refurbished or redeveloped for alternative use, such as hotel. "There's more interest in that than just a pure office building," says JLL's Manchharam.
This story first appeared in The Edge Singapore weekly edition of Apr 01-07, 2013.
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