These are strange days for the commercial real estate market in Singapore. On the one hand, rents have been falling for the past two years and are expected to continue coming off significantly in 2017. On the other, capital values of Grade A CBD office buildings are not merely holding firm but are, in fact, rising. This behaviour al mishmash between the rental and capital markets is a result of the different objectives of the market players. Rents have been declining because tenants are reeling from the global economic malaise, or, like financial institutions, facing structural issues in their business models. Thus, they are giving up space. The increasing supply of new office buildings does not help on that front.

Investors, particularly institutions and local developers, are aghast at recently transacted prices as these imply a significant degree of yield compression, not only using current passing rents, but even more so when leases are due for renewal and/or review. Yet judging from four recent transactions, it appears that buyers are undaunted by this fundamental measure of return.

For example, the transactions of the the Straits Trading Building and 110 Robinson Road reported net yields of 2.8% (gross at 3.5%) and about 1% respectively. In comparison, in 3Q2016, the net yields from Savills’ basket of Grade A office buildings based on valuation prices was 3.4%.

If we include vacant land, in early November, IOI Properties of Malaysia submitted a bid of $2.57 billion for a piece of prime land in the CBD. With the imputed construction and ancillary costs, the breakeven price worked out to about $3,000 psf based on a net lettable area (NLA) of 1.29 million sq ft — higher than that for the adjacent site, Asia Square Tower 1, which was sold to the Qatar Investment Authority in June this year for $2,674 psf.

Why have investors shell out hundreds to billions of dollars to acquire assets at prices above the pre vious high water mark, and more crucially, buying when rents, and thus yields, are expected to compress further in the coming year?

 

Singapore CBD Grade A office building net yield