SINGAPORE (EDGEPROP) - On July 7, TE Capital Partners, the Singapore investment management firm set up by two siblings of the third-generation Teo family of Tong Eng Group, and Singapore-listed property group Roxy-Pacific Holdings, jointly announced that they had acquired an office building at 350 Queen Street, in Melbourne CBD, in a 60:40 joint venture. The purchase price of A$145 million ($141.87 million) for the 20-storey building makes it one of the biggest investment deals in Melbourne this year, after Singapore’s sovereign wealth fund, GIC jointly with Dexus paid A$644 million for a 50% stake in Rialto Centre in April; and A$206 million for a 50% share in 222 Exhibition Street at the end of July.
The deal at 350 Queen Street comes amid heightened risks in the commercial market due to Covid-19, and coincided with the imposition of a six-week lockdown in Melbourne by the Victoria State Premier, Daniel Andrews. As the level of daily new infections continued to spike, a "state of disaster" was declared on Aug 2, with more drastic measures imposed for the next six weeks. This includes a curfew from 8pm to 5am, grocery shopping limited to one person per household, and travel distance restricted to 5km from home. With more businesses to shut in this latest lockdown, an additional 250,000 jobs could be lost.
Between January to June, sublease availability in the Melbourne office market surged 365% to 72,800 sq m (783,641 sq ft), says CBRE in its 2Q2020 office report. Contraction was the primary driver of sublease vacancy, which is expected to rise further in 2H2020 with more job cuts announced by several major occupiers.
Putting further stress to office vacancy is the biggest increase in new supply in nearly three decades over 2020-21, adds CBRE. While around 90% of the upcoming new supply in the CBD has been pre-leased, some of the resulting backfill is forecast to drive vacancy up. CBRE data shows vacancy in Melbourne CBD at 3.2% in 2Q2020.
Whie rents have held steady, a substantial rise in incentives has pushed effective rents down, notes CBRE. Effective rental growth is expected to stay negative until 2022.
Even though the immediate outlook seems bleak, siblings Emilia Teo and Terence Teo, managing directors of TE Capital Partners, are unfazed. “There may be headwinds in the near term,” says Emilia. “But pre-Covid, Melbourne had a strong leasing market with low vacancy rates, strong rental growth and good returns. Post-pandemic, we still believe in the long-term prospects of Melbourne and Australia.”
The current market uncertainty has also made vendors more inclined to adjust selling prices in order to find a buyer, points out Terence. For instance, at 350 Queen Street, the building owner was willing to offer further price adjustments. The 20-storey commercial building has a total net lettable area of 235,889 sq ft, with predominantly office space and some retail space. It is currently 87% occupied, with weighted average lease expiry of four years.
This latest acquisition will be in the portfolio of TE Capital, which was set up by Emilia and Terence last year as an investment and asset management firm. “While we have already done many joint ventures with external parties, we wanted a designated institutional outfit that would formalise our intent to enter investment management and asset management,” says Terence. “We will co-invest alongside other like-minded capital partners.”
TE Capital will not only invest and manage the assets of TE2 Development, the development and investment arm of the family office set up by their father, Teo Tong Lim, the group managing director of Tong Eng Group; but that of other high–net-worth families and institutions as well.
With half a billion worth of investments in Australia today, the Teo siblings are, understandably, famous there, especially in Melbourne. In Singapore, the storied group has a history spanning 70 years. The company was founded by Teo Thye Chor and his brother, Thye Hong, who came to Singapore from Fujian in the 1940s after World War II. The business started with the trading of electrolytic tin-plates used in the production of tins and bottle caps.
The brothers saw the opportunity to venture into property development in the 1950s when there was a call to rebuild Singapore after the war. They developed the first industrial estate in Paya Lebar. Thereafter, they scooped up greenfield freehold land in the suburbs of Changi, Upper Serangoon Road, Yio Chu Kang and Pasir Panjang. Over the years, the land bank was developed into residential projects such as Changi Heights, Poshgrove East, Stratton Park and Trendale Tower. The business was passed on to the second generation, Thye Chor’s two sons, Tong Wah and Tong Lim. Thye Hong’s two sons, Daniel and Teck Weng, started Hong How Group, and remain directors of Tong Eng Group.
Following the passing of Tong Wah in 2007, the group has been headed by his younger brother, Tong Lim, who has been with the firm for more than four decades. Recent residential developments include Belgravia Villas and Belgravia Green, located off Ang Mo Kio Avenue 5; Goodwood Grand and Three Balmoral located along Balmoral Road in the prime district 10. Meanwhile, the 85-unit Wilshire Residences and the 186-unit View at Kismis, both launched last year, are developed jointly by TE2 Development and Roxy-Pacific.
Tong Eng Group is no stranger to commercial developments either. The group’s developments include Arc 380, the redevelopment of the group’s former Eminent Plaza and Lavender Food Square; as well as Centrium Square, a redevelopment of the group’s former Serangoon Plaza. The group’s headquarters is still at Tong Eng Building on Cecil Street, where it has been for the past 40 years, since the 999-year leasehold, 26-storey office tower was completed in 1980.
Over the past decade, Tong Eng Group and its various entities have acquired $2 billion worth of properties and developed projects worth more than $3 billion in terms of gross development value.
Emilia and Terence have made their mark in Australia, primarily in Melbourne and Sydney. Before the lockdown, they had been travelling to Australia every few weeks. They even have have a team of 10 to help them undertake the day-to-day activities of managing their assets and looking at investment opportunities. Of the 10, five are based in Australia. The Teo siblings continue to be “very hands-on” in all aspects of their business, adds Emilia.
“We have had pretty good returns given the good governance and strong population growth,” says Emilia. “Australia is where we have built our capabilities and it’s a market we will continue to focus on.”
Their first foray in Australia was the purchase of the former Harley-Davidson building at 111-125 A’Beckett Street in the Melbourne CBD for A$38 million in early 2015. In January 2017, the property was sold for A$61 million to Malaysian developer S P Setia, which is developing the site into a new mixed-use project called Uno Melbourne, featuring 486 apartments and 256 hotel rooms.
The second property in Australia was a 14-storey, freehold commercial building at 117 Clarence Street in Sydney CBD. It was purchased in a 50:50 joint venture with Roxy-Pacific for A$81 million in late 2015. The partners flipped it for A$153 million, or 89% higher, in August 2018.
In November 2017, Roxy-Pacific and TE2 Development also purchased a freehold building at 312 St Kilda Road in Southbank, near Melbourne’s CBD, in a 45:55 joint venture. The purchase price of the building was A$74.1 million. The freehold building is mixed-use, and contains a conference centre, apartments, offices and basement carpark.
Another joint purchase by Roxy-Pacific and TE2 Development was in November 2018: the NSW Aboriginal Land Council’s building at 33 Argyle Street in Parramatta, Sydney, for A$40.8 million. TE2 Development holds a 60% stake in the property, with Roxy-Pacific holding the balance 40% stake.
Besides the CBD area, the Teos have also invested in suburbs that show promising growth. One such purchase was an 11-storey office building at 5 Queens Road, Melbourne, for A$116.6 million in December 2016, with an initial yield of 5.6%. The 11-storey hexagonal glass and granite office building has a floor area of 19,0743 sq ft, and basement parking for 323 cars.
The Teo siblings also gravitate to buildings with strong tenant covenants, for instance, government agencies or established firms. One such purchase was the headquarters of the Country Fire Authority at 8 Lakeside Drive, Burwood East, in Melbourne, for $18.08 million in September 2017. Another is 33 Argyle Street in Parramatta, Sydney, where the NSW Aboriginal Land Council is the anchor tenant. At 312 St Kilda, they have a strong multinational healthcare tenant.
“We are familiar with the nuances of the real estate market, tenant demand and overall dynamics of these different sub-markets,” says Terence. “We look at each individual asset in relation to our whole portfolio.”
Besides core assets in the CBD, they have also been interested in “value-add opportunities” — properties that are well located but where the buildings could benefit from better management, repositioning or asset enhancements, says Emilia.
An example is the office at 350 Queen Street, purchased with Roxy-Pacific last month. The building has an initial yield of 4.8%, which is in line with prime yields in the Melbourne CBD in 2Q2020, according to CBRE. TE Capital intends to invest a further $10 million in an asset enhancement programme over the next 12 months. This includes reconfiguring the arrival lobby, bringing in exciting F&B and retail offerings, adding end-of-trip facilities, refurbishing the lift lobby on every floor, and upgrading key building services such as energy efficiency.
Emilia and Terence see potential in the office building given that it is part of the landmark mixed-use development Queen’s Place, designed by award-winning architects Fender Katsalidis Architects and Cox Architecture. The office building sits between two upcoming 79-storey residential skyscrapers of more than 810 feet (247 metres), which will have a total of 1,700 apartments when completed. The residential towers will be among the tallest towers in Melbourne, and located close to Queen Victoria Market as well as public transport such as the Melbourne Central station and the upcoming State Library station.
Chinese developer 3L Alliance is behind Queen’s Place. According to an update on the project on June 26, construction of the North Tower, the first residential tower, is well underway, despite the challenges of Covid-19. Façade panels are being installed, ground-floor tenancy and fitouts are underway, supermarket fitout in the basement and carpark is almost complete, and construction of the tower continues.
When the residential tower is completed, the commercial office tenants at 350 Queen Street will benefit from the upcoming public plaza with its retail laneway offering a mix of restaurants and shops, says TE Capital in a statement.
“Despite the market uncertainties arising from Covid-19, we believe the office market in Australia will outperform in the long term,” says Terence. “Some of our tenants prefer to stay put and renew their leases given the uncertainty. They prefer to stay in an existing quality building where they are comfortable, rather than chase a lower rent elsewhere. For other tenants, it’s a flight to quality.”
For now, Emilia and Terence will focus on Australia and Singapore. “We will look at other markets once travel restrictions are lifted,” says Terence.
Beyond Australia and Singapore, TE Capital will also look at investment opportunities in China, Japan and South Korea. “In these markets we are focusing on the office sector too,” says Terence. “However, we are open to other asset classes, for instance, multi-family and selective retail and hospitality.”
Check out the latest listings near Belgravia Villas, Belgravia Green, Goodwood Grand, Three Balmoral, Wilshire Residences, View at Kismis
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