Private wealth continues to drive capital market deals

/ EdgeProp Singapore |

November 10, 2023 11:25 AM SGT

From left: Chris Pilgrim, Colliers managing director of global capital markets, Asia Pacific; Luke Dawson, Colliers head of global and EMEA capital markets; and Tang Wei Leng, Colliers head of capital markets and investment services, Singapore (Photo: Albert Chua/EdgeProp Singapore)

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In the Asia Pacific (Apac) region, real estate sector returns continue to be hampered by interest rate pressures on the cost of capital, says Colliers in its Nov 6 report on Apac 3Q2023 capitalisation (cap) rates. Overall property transaction volume in the region remained subdued in 3Q2023, with the trend towards smaller transactions continuing.

In Singapore, cap rates across sectors remained flat, with a lack of sales evidence to support any movement, notes the report. Increasing lending costs are putting pressure on many investors and owners.

However, deep-pocketed investors are taking advantage of this opportunity to acquire assets for the long term. The latest example is Malaysian billionaire Lee Yeow Seng, CEO and biggest shareholder of Bursa Malaysia-listed IOI Properties Group. Lee acquired Shenton House en bloc for $538 million on Nov 1 via his private vehicle Shenton 101. The price was about 9% below the previous reserve price of $590 million.

Chinese steel tycoon Du Shuanghua purchased Far East Shopping Centre on Orchard Road en bloc for $908 million on Sept 28. The purchase was made via Glory Property Development, an entity of Du’s Singapore-registered mining and resources company Bright Ruby Resources. It is the most significant en bloc deal this year.

In July, Worldwide Hotels Group, owned by Hotel 81 founder and chairman Choo Chong Ngen, acquired the 542-room Parkroyal Kitchener Hotel for $525 million. The seller was listed property developer UOL Group’s hospitality unit, Pan Pacific Hotels Group. The deal is Singapore’s largest single-asset hotel transaction and the second largest in Asia Pacific this year.

Government land sales; upswing in retail, hospitality

In 3Q2023, Singapore recorded around $7 billion worth of investment deals, marking an 84.5% increase q-o-q and an 8.5% increase y-o-y, says Colliers in a report on Oct 23.

Government land sale (GLS) sites contributed $4.1 billion (59.2%) of the total deals last quarter. The biggest GLS deal was the Marina Gardens Lane residential site sold to a consortium comprising Kingsford Huray Development (a unit of Chinese developer Kingsford Group), Obsidian Development and Polarix Cultural & Science Park Investment. The purchase price for the site was $1.034 billion ($1,402 psf per plot ratio).

Including GLS sites, the residential sector accounted for 48.1% of investment deals last quarter, followed by mixed-use sites (30.2%) and hospitality (7.5%).

Excluding the GLS deals, investment transaction volume contracted to $2.9 billion in 3Q2023. Mixed-use sites constituted 31.8% of the deals, followed by hospitality (18.4%) and commercial sectors (15.5%).

Buying was supported mainly by end-users and private wealth, with investors keen to catch the upswing in retail and hospitality assets on the back of the tourism recovery, says Colliers. Higher-yielding assets, such as high-specification industrial properties and assets with enhancement potential, are also likely to find buyers.

Asset owners will continue looking for opportunities to redeploy capital and manage debt. However, with insufficient property yield expansion to maintain spreads over the rising cost of capital, investment volume is likely to remain sluggish, notes Colliers in its Nov 6 report.

“More assets will come up for sale as the need to reduce gearing grows imminent,” says Tang Wei Leng, Colliers head of capital markets and investment services, Singapore.

However, there is some price resistance between buyers and sellers, adds Tang. “The bid-ask spread has to narrow for more deals to take place.”

Cross-border activity

Against the macroeconomic backdrop of high interest rates and persistent inflation, cross-border activity accounted for just 18% of overall capital market deals in 1H2023, according to Luke Dawson, Colliers head of global and Emea capital markets. Over the same period last year, cross-border deals comprised 25% of total capital market deals, compared to about one-third in 1H2021.

“We need interest rates to find some level before the necessary repricing can take place that will reset the market,” says Dawson. “Until we know what the stabilised level will be, it is challenging for investors to make decisions.”

Singapore was the biggest source of global capital in 1H2023, according to Colliers, with cross-border investments worth US$21.84 billion. Singapore has overtaken the US, which fell to second place with US$15.852 billion worth of cross-border deals in the first six months of 2023. Singapore was also Apac’s most significant source of cross-border capital, contributing US$6.329 billion.

Apart from Singapore, Hong Kong and Japan were the fourth and fifth largest global cross-border capital sources in 1H2023, with US$6.508 billion and US$5.151 billion, respectively.

On the other hand, the US has been the biggest recipient of cross-border capital in 2023 and has shown the most positive momentum in investment activity until the end of 2Q2023.

The deal momentum was primarily driven by large institutions in Singapore and Japan and increased activity from Australian superannuation funds, says Chris Pilgrim, Colliers managing director of global capital markets, Asia Pacific.

For example, Singapore’s sovereign wealth fund GIC has catapulted to the top of the Private Equity Real Estate (Pere) Global Investor 100 ranking in 2023, according to a Pere report on Oct 2. Based on MSCI figures, GIC deployed US$24.5 billion in global property in the 12 months until the end of June. GIC has equity of US$69 billion deployed in private real estate with a particular focus on logistics, student accommodation and hospitality sectors, according to Pere Research.

Weave Living announced the acquisition of nine new multi-family residential properties totalling 352 units in Tokyo, Japan (Photo: Weave)

Multi-family asset class

Some investment themes have emerged, notes Pilgrim. Asia Pacific investors, particularly from Singapore, are allocating more capital to the multi-family asset class. “If you want exposure to multi-family in this region, the only established Asian market is Japan, making it the number one destination,” he adds.

For instance, CapitaLand Investment purchased an Osaka-based residential developer to acquire six multifamily assets in Osaka, Japan, for $141.4 million in April. The purchase is for its flagship regional core-plus fund, CapitaLand Open End Real Estate Fund.

In September, City Developments Ltd (CDL) invested in 25 high-quality freehold residential assets with 836 units in Tokyo for JPY35 billion ($321.9 million). It marks CDL’s largest transaction in Japan’s private rented sector.

On Nov 3, Hong Kong integrated rental accommodation provider Weave Living announced the acquisition of nine new multi-family residential properties totalling 352 units in Tokyo, Japan. Weave, which has a presence in Hong Kong and Singapore, opened its first three properties in Tokyo in early November: Waseda, Monzennakacho, and Higashi-koenji. The company intends to scale up its presence in Tokyo and Osaka and to grow its assets under management in Japan to over US$1.5 billion by 2025.

Australia is also beginning to develop a multi-family market, says Pilgrim. “However, it’s at the developmental stage, and, therefore, more of a build-to-rent phase,” he adds.

Industrial and logistics – top pick

Industrial and logistics is another sector that has been the top pick for investors globally for the last two years, according to Colliers’ 2023 Global Investor Outlook survey. According to Colliers’ findings, investors have deepened their interest in the sector, which accounts for 25% of all global activity as of August 2023.

According to Colliers, the US was the top global cross-border investment destination for the industrial and logistics sector, with US$6.869 billion worth of deals, up 32.4% since the start of the year.

Singapore was once again the leading source of global cross-border capital going into the industrial and logistics space in 1H2023. It accounted for a total of $8.971 billion worth of deals. The US was in second place with US$7.648 billion.

Increase in sales and leasebacks

Another interesting trend this year was the surge in sales and leasebacks, notes Colliers. “This year, we’ve seen a meaningful increase in sale-and-leaseback transactions that allow owners to release equity from a property but stay in occupancy,” says Dawson. “There is still a desire to invest in this structure and demand long leases from strong tenants.”

In May, Colliers advised global hotel and hospitality giant Accor on the EUR460 million ($666 million) sale of its global headquarters in Paris region, France, to UK-based real estate investment firm Valesco Group. The deal is the largest office investment deal in continental Europe this year.

It is part of Accor’s asset-light strategy to simplify its balance sheet. The transaction includes a 12-year sale-and-leaseback agreement with an initial annual rent of EUR22 million.

Closer to home, CapitaLand Ascendas REIT acquired Seagate Singapore’s R&D facility, including a data centre, for $218.24 million in May. The building, located in one-north, was completed eight years ago. Seagate Singapore will remain in place for the next 10 years as part of a leaseback agreement with a built-in rent escalation of 2.5% per annum. Seagate will have the option of an additional 10-year extension. Colliers brokered the deal.

While transactions may have been sluggish this year, “my view is that capital from the Asia Pacific region, particularly in terms of global aspirations, will be very active in 2024”, says Pilgrim. “I genuinely think that at any point in time, assuming interest rates stabilise, you can secure assets at entry yields which we haven’t seen for over 10 years.”

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