Big-ticket deals set to be the lowest in 6 years

THIS year’s tally of investment sales of property – big-ticket transactions of at least S$10 million – is set to be the lowest in six years, preliminary numbers from CBRE and Savills Singapore show.

Still, the tally will not be as bad as that for 2009, when transactions dived during the Global Crisis.

Savills’ numbers reflect S$16.7 billion of deals so far this year (up to Dec 16), – about 11 per cent lower than the S$18.8 billion clocked last year.

CBRE’s numbers show a similar trend, with S$16.5 billion of transactions from Jan 1 to Dec 16 this year, a drop of 15 per cent from last year’s S$19.4 billion; these figures include property transactions involving IPOs (initial public offerings) such as Reit and business trust listings – not that that would make a difference to this year’s numbers since there have been no such listings involving Singapore properties since the start of 2015.

Brokers say that while there is liquidity and Singapore remains on the radars of overseas property funds, potential buyers have become cautious on the back of a sluggish economy, stock market volatility, rising interest rates, property cooling measures, as well as fundamentals for various real estate classes.

On the other hand, with some property owners sticking to their asking prices, a price gap has resulted in many cases.

CBRE executive director, investment properties, Jeremy Lake said: “It has been quite hard work in terms of matching buyers with sellers. In many cases buyers have chosen to watch and wait; this cautiousness is reflected in lower offer prices – while vendors have stood firm with their desired pricing.

“Overseas investors like Singapore but have different views. To use a traffic-light colour analogy, some may feel it is red now, some green and some amber. To convince investors to jump in now, vendors’ pricing needs to reflect the uncertainties in the market. ”

Agreeing, Steven Ming, managing director, investment and residential services, at Savills Singapore, noted: “The office sector is dogged by oversupply of Prime Grade A office space and weakened demand. Property cooling measures continue to weigh down on the residential sector as well . . . The silver lining is that there remains ample liquidity seeking real estate investments.”

Cushman & Wakefield Asia Pacific’s regional executive director, capital markets, Priyaranjan Kumar, said that Singapore still continues to be among the top three target destinations in Asia for core investors – after Tokyo and Sydney. These investors include sovereign wealth funds (SWFs), global pension funds, insurance companies.

Investment sales of real estate are often seen as a gauge of developers’ and property investors’ confidence in the medium to long-term prospects of the property market.

Based on Savills’ analysis, deals originating from the private sector from Jan 1 to Dec 16 have amounted to S$10.9 billion, down 10.5 per cent from S$12.2 billion in 2014. This gives the private sector about 65 per cent share of investment sales value so far this year.

Deals originating from the public sector – comprising mostly state land sales, but also including the S$550 million sale of CPF Building to a unit of Ascendas – have added up to S$5.8 billion, a drop of 12.8 per cent from 2014.

Combining public and private-sector deals, transactions in the residential sector have retreated 25.2 per cent to S$5 billion this year from S$6.7 billion last year. The reduced number of residential sites on the confirmed list of the Government Land Sales (GLS) Programme is a factor.

Another factor, notes CBRE’s Mr Lake, is that bulk purchases in completed private residential projects have been severely hampered by the “prohibitive” 20 per cent loan-to-value limit for residential property purchases by corporates.

Going by CBRE’s figures, office transactions so far this year have amounted to S$3.8 billion, down 21.5 per cent from 2014’s S$4.8 billion. Major transactions include CPF Building (S$550 million), Axa Tower (S$1.17 billion) and Tuesday’s S$1.1 billion deal between City Developments Limited (CDL) and Alpha Investment Partners involving three office assets.

Commenting on the bid-ask price gap in the office market, Cushman’s Mr Priyaranjan reckoned that most sellers are trying to shoot for prices that reflect a 3.5 per cent or lower net initial yield to the buyer. Investors are willing to pay these prices for prime, well-let assets with diversified tenant mix. “They won’t do it for a building completed recently and still filling up or which is 30-40 per cent vacant.

“What makes buyers nervous these days are office buildings that have a big tenant expiry in the next couple of years.

“(Because of the impending completion of a large amount of offices), it is very difficult for landlords to attract a tenant to renew a lease, or to achieve a positive reversion on rents because everyone is competing for these large tenants,” he noted.

On the other hand, buildings with good specifications and which are let to diversified tenant bases with less exposure to expiry on renewal from big anchor tenants can be expected to outperform significantly on pricing.

“The recent portfolio transaction between CDL and Alpha reflects an example where if downside protection is provided to a buyer, then strong pricing can be achieved on the assets,” he added.

On a positive note, CBRE’s Mr Lake envisages some major office leasing deals next year in new projects which will provide “data points” that result in some of these foreign investors improving their view on the Singapore market from a “red” (traffic-light) signal to “amber”, or from “amber” to “green”.

“Once there’s some visibility on leasing in the next three to six months, we’ll see some of these international investors willing to commit during the course of next year in the office market in particular – which may remove the price gap in the first half.”

Retail property deals have more than doubled to S$1.06 billion so far this year from S$445 million in 2014, CBRE’S numbers show. Major transactions include Bedok Mall (S$780 million).

Deals in the mixed-use category have also surged to S$3.8 billion from S$1.56 billion; major transactions include the S$1.67 billion Paya Lebar site bought by an Abu Dhabi Investment Authority and Lend Lease tie-up at a state tender; an effective stake of 67.95 per cent transacted at One Raffles Place (at nearly S$1.15 billion), as well as the sales of Park Mall and Thong Sia Building.

Market watchers note that all sectors of the Singapore real estate market have oversupply issues. For retail, there are other issues such as labour shortage and the competition to physical stores from online shopping and e-commerce.

CBRE Research’s head of Singapore and South-east Asia, Desmond Sim, predicts that given the lacklustre outlook on Singapore’s economy as well as pressure from rising interest rates, 2016’s investment sales volume will be tepid on the whole. “Including a few deals that may be initiated in 2015 and which may be completed in 2016, we expect the total investment sales volume, excluding IPOs, to be in the region of S$15-16 billion, similar to 2015. This will also be a function of the number of GLS sites on the confirmed list in 2016.”

Mr Ming of Savills expects S$15-17 billion of deals next year. The most pressing issue, he said, will be that “challenged near-term growth prospects and interest rate rises will elevate yield expectations for short to mid-term investors, displacing most of them from competitive contention of acquisitions”.

On the brighter side, this then creates opportunities for equity-rich, longer-term investors with lower cost of capital – such as SWFs and insurance funds – to take positions. “We expect that there will be continued interest for trophy office and retail enbloc assets even at tight yields, as assets in these sectors are generally closely held,” said Mr Ming.

BT – 17 Dec 2015

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