Institutional investors seen on the hunt for CBD deals but mind the price gap

/ EdgeProp Singapore
December 27, 2019 3:00 PM SGT
SINGAPORE (EDGEPROP) - Investors swooped in on Singapore’s office and hospitality assets this year as residential investment deals came off a high following the government’s property cooling measures in July last year.
According to Colliers International, investment deals above $10 million were led by the commercial sector this year, pulling in close to $11.34 billion worth of deals based on preliminary figures as of end November. This also represents 39% of the total volume of investment transactions recorded in the 11 months of the year.
According to Tricia Song, head of research for Singapore at Colliers International, Singapore’s total investment sales figure this year until November stood at $28.7 billion. The overall tally for the entire year is expected to fall short of the $38 billion recorded in 2018, when residential collective sales hit a record high, she says.
The largest transaction in 2019 was the sale of Duo Tower and Duo Galleria for $1.58 billion (Picture: M+S)
Coming in second was residential investment sales totalling $6.64 billion, while hospitality sales ranked third at $5.66 billion over the 11-month period. These two sectors accounted for 23% and 20% of the total investment pie in 2019.

Hottest deals of the year

Big-ticket commercial deals by Reits and institutional investors dominated real estate investment deals this year. The largest transaction was the acquisition of Duo Tower and Duo Galleria by Munich-based asset manager Allianz Real Estate and Hong Kong-based real estate private equity firm Gaw Capital Partners.
Duo Tower is a 20-storey Grade A office asset, while Duo Galleria is a 59,873 sq ft retail mall. They make up the office and retail components of the mixed-use development Duo which also features a hotel and a residential component. The transaction occurred in July and the sale consideration amounted to $1.58 billion.
The acquisition also marked Gaw Capital’s second office deal in Singapore this year. In January, the firm acquired 77 Robinson Road for $710 million. Other notable commercial transactions included the sale of Chevron House for $1.03 billion in April, Frasers Property’s divestment of a 50% stake in Frasers Tower in June, and the sale of 313 @ Somerset for $1 billion in September.
Significant hospitality assets also changed hands and the sector clocked in a record transaction volume that was backed by improved investor confidence, limited hotel room pipeline supply, and the expected increase in visitor arrivals over the next few years, says Song.
The largest hotel deal in terms of transacted price was the purchase of Mandarin Orchard for $1.2 billion following the merger of OUE Commercial Reit and OUE Hospitality Trust in September. The enlarged Reit also bought Crowne Plaza hotel at Changi Airport for $486 million.
Duo’s five-star luxury hotel Andaz Singapore was also acquired by Hoi Hup Realty in a sale worth $475 million in October. According to JLL, the appointed advisor for the transaction, the price is the highest ever achieved for a standalone hotel deal in Singapore.
On the residential front, government land tenders dominated residential investment sales. One of the biggest land tenders in terms of land price was a residential site at Tan Quee Lan Street that was awarded to GuocoLand and Hong Leong Holdings in September. The joint venture partners submitted a top bid of $800.2 million.
Meanwhile, a 3.8ha white site next to Pasir Ris MRT station was awarded to subsidiaries of Allgreen Properties and Kerry Properties in March. Both companies are part of Malaysian tycoon Robert Kuok’s group of companies. The companies jointly submitted the winning bid of $700 million.

Cross-border transactions

According to Tay Huey Ying, head of Singapore research at JLL, investors see Singapore as a safe haven amid the global economic uncertainty, and private equity and institutional investors were drawn to the recovery in the city state’s property markets.
Colliers’ Song agrees, adding that cross- border investment sales into Singapore have been gradually increasing since 2014, and totalled $10.71 billion in the first nine months of this year. Yet this falls short of domestic capital which accounted for $18 billion, or 63% of Singapore’s total investment volume for the year, she says.
Meanwhile, the expected wave of institutional investors from Hong Kong did not materialise, says Jeremy Lake, managing director, investment sales and capital markets, Savills Singapore.
“There is an expectation that some of the capital invested in Hong Kong may drift into overseas real estate markets such as Singapore. Many Hong Kong-based investors judge Singapore to be an attractive market with appealing attributes. But while some of them have moved cash into banks here, this does not mean that they are looking to immediately invest,” he says.
Hong Kong-based private equity firm acquired 77 Robinson Road for $710 million this year (Picture: The Edge Singapore)
According to data from Real Capital Analytics, cross-border investments into Singapore from Hong Kong increased to $3.84 billion in the first three quarters of 2019 from $2.13 billion in 2018, and more than half of the capital injections occurred in 3Q2019.
“However, we believe this is not due to the situation in Hong Kong which happened in June, as fund-raising, mandates, and investment assessments could take more than a year. Singapore stands out as an investor favourite on its merits, with the office and hotel sectors benefitting from a cyclical upturn,” says Song.
She adds that the bulk of Hong Kong-based investments in the first nine months of 2019 went into the commercial sector. This includes Arch Capital Management’s purchase of Anson House for $210 million in August, as well as Gaw Capital’s joint acquisition of Duo Tower and Duo Galleria with Allianz Real Estate, says Song.
Arch Capital Management purchased Anson House for $210 million in August (Picture: The Edge Singapore)
According to Shaun Poh, executive director of capital markets at Cushman & Wakefield, “Hong Kong-based investors are definitely exploring opportunities in Singapore, given the unstable situation in Hong Kong. But no one has put down any money yet. They are still trying to get a better feel and understanding of the market here.” He adds that most of these investors are eyeing core CBD commercial properties priced from $150 million to $300 million.

Commercial and hotel sector

Foreign investors had reason to feel buoyant about Singapore’s office market in 2019, especially when average monthly gross effective rents of CBD Grade A offices are expected to strengthen by 15% to 20% over the next four years, says Tay.
Investments in office assets also surged to a three-year high in 3Q2019 in spite of stalling office rent growth.
“This underscores investors’ confidence in the mid-term prospects of Singapore’s office property market as demand and supply dynamics support rents returning to growth,” she adds.
Lake of Savills says that “it is likely the economic situation will clear up by the end of 2020 which will encourage office rents to resume further rental growth. Leasing activity on hold in 2020 would create some pent up demand that will be released in 2021”.
Another focus for investors in 2020 will be the hospitality sector, says Lake. “Since the end of the residential collective sales peak in July 2018, collective sale interest in private development sites have been geared toward sites that are suitable for redevelopment into hotel or mixed commercial developments,” he says.
A recent case is the sale of Min Yuan Apartments and Waterloo Apartments to Singapore-listed Fragrance Group. The hotel developer has received approval from URA to convert the residential sites into hotel use, and Fragrance has announced that it will amalgamate the sites and build a 14-storey hotel comprising more than 500 rooms.
Wilkie Edge, which was bought over by Lian Beng Group and Apricot Capital, has also received approval for hotel conversion, while Peak Tower Corporation, which purchased Selegie Centre in March, is seeking approval to redevelop the site into a hotel.
According to Song, the spike in interest in hospitality assets is driven by a perceived shortage of hotel room supply, as well as the continued strong growth in international visitor arrivals.
The largest hotel deal this year was the purchase of Mandarin Orchard for $1.2 billion (Picture: Samuel Isaac Chua/The Edge Singapore)
She adds that “accounting for all the known supply so far, the total new hotel room completions over 2020-2024 would average around 1,400 units per annum, still well below the last 10year average of circa 2,800 rooms per annum.”
Some landlords of older CBD commercial buildings may have been encouraged to explore redevelopment opportunities under the CBD Incentive Scheme, says Song.
Announced as part of the 2019 Draft Master Plan, the scheme aims to entice owners to redevelop their ageing commercial assets into mixeduse projects, offering 25% to 30% additional gross floor area for the redeveloped building.
But development charge rates for hospitality use increased 45.6% in February this year, following an 11.8% increase during the September 2018 DC rate revision exercise.
Fragrance Group has received approval to convert Min Yuan Apartments at 62 Waterloo St into a new hotel (Picture: CBRE)
According to Lake, the incentives are insufficient to encourage a wave of redevelopments to take place in the CBD. The higher DC rates also erases most of the premiums owners could benefit under the incentive scheme.

Interest in shophouses

Based on data compiled by JLL as of Dec 11, there have been fewer shophouse transactions worth $5 million and above this year, with 52 deals valued at $590 million year to date, compared to 90 deals worth $1.18 billion for the whole of 2018.
“The lower transaction volume can be attributed largely to the limited shophouse stock for sale in 2019 and a wider price expectation gap between sellers and buyers as owners are now asking for higher prices,” says JLL’s Tay.
She expects this trend will continue into 2020 as interest in shophouses from family offices, high net worth individuals and boutique funds remains robust.
2020 could see a wider price expectation gap between sellers and buyers as owners are now asking for higher prices (Picture: Samuel Isaac Chua/The Edge Singapore)
Most buyers are foreigners who prefer to avoid paying the higher ABSD for residential properties. But there are some local buyers who are snapping up these assets for wealth preservation. For these buyers, the net yields on shophouses, which are about 2% to 3% today, are still attractive enough, says Lake.
He adds that as the supply of available CBD shophouses dwindles, most investors are looking further outfield at city fringe areas such as Kampong Glam and Jalan Besar to find shophouses available on the market.

Outlook next year

Looking ahead, interest in real estate investing from institutional investors is expected to continue into 2020, especially in light of the expected low interest rate environment that will drive down their lending costs, says Song, adding that real estate investments offer decent yields and provide institutional investors a good means to preserve capital.
Investors could still gravitate towards older assets with the potential for redevelopment or enhancements in light of the CBD Incentive Scheme, while scouting for city fringe assets in light of the government’s drive to decentralise the CBD, says Song.
Based on JLL data as of Dec 11, 2019, strata- titled office deals worth $5 million and above surged to $739.3 million from $397.6 million in 2018. Thus, investment demand is also likely to remain keen on strata-titled offices in 2020, particularly those located in the CBD as the demand and supply dynamics are supportive of continued rental growth and capital appreciation, says Tay. But she cautions the widening price expectation gap between buyers and sellers amid heightened economic uncertainty could still hamper deals in this asset class in 2020.
Reits will likely contribute to more big-ticket investment deals in 2020, says Colliers which anticipates a number of major Reit mergers and acquisitions, or the injection of assets into Reits’ portfolios.
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