A double whammy of increasing supply and softening demand silenced Singapore's office investment market in the early part of the year. But a recent and sudden uptick of sizable transactions may mark a recovery point, industry observers told S&P Global Market Intelligence.
Asia Square Tower 1, which failed to secure CapitaLand Ltd. as a buyer eight months ago, changed hands for about S$3.4 billion to Qatar Investment Authority, setting the record for the biggest single-tower property deal in the Asia-Pacific region.
It is the third noteworthy office transaction within the last three weeks, after Indonesian tycoon-backed MYP Ltd. splurged S$560 million on the Straits Trading Building and Singaporean REITCapitaLand Commercial Trust agreed to buy the remaining 60% stake in the CapitaGreen tower for about S$393 million.
The recent trades are a demonstration of confidence in Singapore as an investment location in the medium to long term and are likely to encourage more buyers to take action, said Greg Hyland, head of capital markets Singapore at JLL.
"In our view, we do see the number of transactions increasing in the second half of this year," he said, adding that investors buying institutional assets for long-term hold should not be daunted by short-term rental fluctuations."There are always rental cycles and rental trends, but investors who have real confidence in the Singapore market are not just buying for the next two years," said Hyland.
During the past 12 months, rental growth in the city-state has seen some correction. New large-scale projects including Guoco Tower and Marina One are set to add more than 3 million square feet of Grade A office space this year, but there is softer demand partly due to a shrinking bank industry and tenants holding back on making decisions because of the new supply.
In the first quarter, the average monthly rents in Singapore's central business areas declined 4.4% from the previous quarter, the biggest drop among all Asian markets, according to Knight Frank's Asia Pacific Prime Office Rental Index that tracks rents in 19 cities across the region.In such an environment, there have been concerns about the leasing prospects for office properties on the market, even for Asia Square Tower 1. The 43-story tower is about 83% occupied at the moment and home to companies such as Citibank and Marsh & McLennan. However, Google, which occupies about 130,000 square feet in the building, will vacant before year-end to relocate to a business park outside the main business district.
But the new owner still has a chance to increase occupancy substantially over the next six to 12 months, according to Jeremy Lake, executive director of investment properties at CBRE Singapore.
Despite rentals coming down, what is improving now is that leasing activity is gradually picking up, according to Lake. "The standoff between landlords and tenants has possibly passed," he said. "Tenants are willing to commit to the current rental levels, and now most landlords are. … There were a few of these new projects which had no tenants earlier in the year are now starting to see deals taking places."
It is possible for Asia Square Tower 1 to cut rents. "Different landlords have different strategies. Some want to maintain high rentals and are happy to have a higher vacancy in the building, while some others rather have a higher occupancy and a lower rental," said Lake.On the demand side, leasing activities will be supported by different sectors of the economy, even though many of the European and North American banks are still quiet in leasing. Some Japanese banks, insurance companies and law firms are now actively looking for leases, Lake said.
"As more tenants are signing up, this is maybe making investors feeling more confident that the market is not as bad as they feared originally," he said. "We expect to see more investment activity throughout the rest of the year."
Potential deals that could happen later this year include Asia Square Tower 2 as well as a 50% stake held by Keppel Land Ltd.'s investment company in Capital Square, a sale launched in April 2015.