SOVEREIGN wealth fund Qatar Investment Authority (QIA) has purchased Asia Square Tower 1 for S$3.4 billion (US$2.45 billion) from BlackRock. The deal announced on June 6 is said to be the single-largest office building transaction in the city state and Asia-Pacific so far.
“The transaction will lead to increased confidence in the marketplace,” says Greg Hyland, head of capital markets Singapore at JLL. “There will definitely be more transactions in the next 12 months.” JLL and CBRE were joint advisers for BlackRock on the sale.
Asia Square’s transaction price of S$3.4 billion translates to S$2,650 psf, with an estimated gross yield of more than 3%. “The successful closing of the deal with QIA could have been attributed to BlackRock’s willingness to lower the price slightly, as previous negotiations with CapitaLand and ARA Asset management at the S$2,800 to S$3,000 psf range ended inconclusively,” says Christine Li, director of research at Cushman & Wakefield.
Completed in 2011, Asia Square Tower 1 is a 43-storey tower with 1.25 million sq ft of net lettable Grade-A office space. Citibank has been an anchor tenant in Tower 1 since 2011 and occupies nine floors totalling more than 250,000 sq ft. The second tower, the 46-storey Asia Square Tower 2, was completed in 2013. Tower 2 is a mixed-use complex with about 780,000 sq ft of Grade-A office space on the lower floors and a hotel spanning the 32nd to 46th floors.
Developing core assets with exit strategy
The two towers at Asia Square were built on two adjacent 99-year leasehold development sites on Marina View purchased from the Urban Redevelopment Authority for a total of S$2.97 billion in late 2007. The sites were then amalgamated and construction of the two towers was estimated to cost S$2 billion then. The developer was private-equity real estate investment firm MGPA, which BlackRock acquired in October 2013.
Asia Square Tower 1 was held in one of BlackRock’s value add and opportunistic funds in Asia, says John Saunders, head of Asia-Pacific for BlackRock Real Estate. The plan was to develop a core asset, lease and stabilise the property, then exit. “We produced returns commensurate with the risks taken for a ground-up greenfield development,” he says. “We’re happy with the exit; we’re happy with the result.”
The sale of Asia Square Tower 1 was “Part 2” of a three-part exit strategy. Part 1 was the sale of the 305-room Westin Singapore in Asia Square Tower 2 in December 2013. The buyer was Japan-based property developer and investor Daisho Group, which paid S$468 million, or a record-breaking S$1.5 million per key. The third part of the exit plan will be the sale of the remaining office block at Asia Square Tower 2. “We will [sell it] eventually,” says Saunders. The occupancy rate at Asia Square Tower 2 is about 80% and, with several leasing deals underway, the occupancy rate will cross 90%, he adds.
Early last year, BlackRock sold the 50-storey AXA Tower in Tanjong Pagar to a consortium led by Perennial Real Estate Holdings for S$1.18 billion, which translated to S$1,750 psf based on the net lettable area of nearly 675,000 sq ft.
“We’re still interested in Singapore,” says Saunders. “The irony is that because of the timing of our funds, we are sometimes a buyer and a seller at the same time.” In Singapore, BlackRock is still keen to invest in office buildings in the central business district (CBD), as well as suburban retail space, as these assets tend to be more resilient, he adds.
Record office deals in the making
On June 1, MYP, a Singapore Exchange-listed investment holding company controlled by the family of Indonesian magnate and philanthropist Tahir, announced that he had signed a deal to acquire the 28-storey Straits Trading Building in Battery Road for S$560 million. The seller is Sun Venture Group, which had acquired the building for S$450 million at end-2014.
Tahir’s acquisition price translates to a record-smashing S$3,520 psf for the building, which has a net lettable area (NLA) of 158,897 sq ft. “It’s a 999-year leasehold building, and that’s pretty hard to come by in Raffles Place,” says Jeremy Lake, executive director of investment properties at CBRE.
The price psf has even surpassed the previous record of S$3,125 psf for the purchase of 71 Robinson Road at the peak of the market in April 2008 by Germany’s Commerz Real, a subsidiary of Commerzbank.
CapitaLand Commercial Trust (CCT) announced on May 23 that it was acquiring 60% of the CapitaGreen office tower that it does not already own. The stake amounts to S$393 million. The acquisition price is based on CapitaGreen’s market value of S$1.6 billion, or S$2,276 psf. The 40-storey, Grade-A office tower is located on Market Street in the CBD and has a total NLA of 704,000 sq ft.
Just the three deals alone — Asia Square, CapitaGreen and Straits Trading Building — will bring the total office investment sales for 2Q2016 to S$4.35 billion, according to CBRE Research. That excludes two significant strata office deals done in the quarter as well: the sale of the entire 13th floor of 6 Raffles Quay for S$28 million (S$2,764 psf); and the sale of the 13th floor of Tong Building for S$25.5 million (S$3,713 psf). If both deals were included, total office investment deals from April to June would amount to S$4.4 billion, says CBRE Resarch, making it a record quarter.
It is a far cry from 1Q2016, in which the sole office investment transaction was the sale of the remaining 50% stake in 78 Shenton Way to Alpha Investment Partners (AIP) for S$301.5 million. The purchase of the stake valued the property at S$603 million, or S$1,665 psf, based on the NLA of 362,199 sq ft. The seller of the remaining 50% stake was Commerz Real, and the deal was brokered by CBRE.
‘Gradual improvement in sentiment’
After a dearth of deals in 1Q2016, there has been a flurry in just the past month. “With the sale of CapitaGreen, Straits Trading Building and now Asia Square, we have the ingredients for gradual improvement in sentiment,” says CBRE’s Lake. “These will provide data points for investors who perhaps thus far have chosen to watch and wait.”
The two major office buildings said to be injecting 2.77 million sq ft of new Grade-A office space into the CBD when they are completed in 2H2016 and early next year are GuocoTower (890,000 sq ft) and Marina One (1.88 million sq ft) respectively.
Leasing activity in these two new office schemes have picked up in recent months. For example, Bank of Tokyo-Mitsubishi UFJ is said to be moving to Marina One and taking up 140,000 sq ft of space, and Daiwa Capital Markets is expected to move into GuocoTower, according to Douglas Dunkerley, group managing director of Corporate Locations in his recent report.
“As the number of tenants signing up in these new developments increases, there will be more confidence about the market’s ability to absorb the volume of new supply,” adds CBBRE’s Lake. “Rents will bottom a bit earlier than expected, and investors will conclude that the market is not so bad after all.”
Stoking the flames
Some office buildings that were put up for sale last year and lapsed could soon be revived. “Some investors may now bring forward their decision to buy instead of postponing it,” says Lake.
For instance, Tower 15 on Hoe Chiang Road was launched for sale last November at S$475 million, with CBRE as the marketing agent. The 29-storey tower contains a mix of offices and a hotel, with a three-storey annex podium. The building has an NLA of 210,268 sq ft and sits on a 39,337 sq ft freehold site. The site can also be redeveloped into a new 30-storey strata commercial development with a mix of retail and office space.
Another building that could be on the market again is 77 Robinson Road, which was put up for sale last September through sole agent DTZ. The 35-storey office building in the CBD has an NLA of 293,818 sq ft, including 6,018 sq ft of retail space and 180 parking spaces. The 99-year leasehold building has a lease dating from 1989. The price tag then was S$650 million or S$2,200 psf based on NLA. The building was last put up for sale in June 2011 by Colliers International as the marketing agent.
The building at 77 Robinson Road is held by German fund SEB ImmoInvest and was acquired in April 2007 for S$526 million (S$1,783 psf). The fund is managed by SEB Asset Management, which was acquired by Cordea Savills early last year. The entity has since been rebranded Savills Investment Management. As the fund has to be liquidated according to guidelines of the German regulatory authority BaFin, Savills Investment Management hopes to be third time lucky with the sale of 77 Robinson Road. It is said to have appointed CBRE as the marketing agent.
In April last year, AIP put its 50% stake in Capital Square up for sale. The 16-storey office building in the CBD has a total NLA of 388,215 sq ft and was completed in 1998. It has 80 years left on its lease. The indicative price last year was S$2,800 psf, which valued the building at S$1.09 billion, or S$543.5 million for a 50% stake. JLL and CBRE are joint marketing agents for the property, which is still up for sale.
Short-term challenges
But the office market continues to face challenges in the short term, owing to weak business conditions, cautions Cushman & Wakefield’s Li. She says, “Leasing demand continues to be affected by headwinds in the banking, oil and commodities sectors.” Li projects that Grade-A CBD rents could moderate a further 10% to 12% in 2016, but stabilise in subsequent years, given the significantly reduced supply pipeline in 2017 and 2018.
Local and global investors who are looking at Singapore are adopting a long-term view, says JLL’s Hyland. “They are not looking backwards over the last few quarters or to the next quarter,” he adds. “They are taking a five- to 10-year bet on Singapore.”
Cecilia Chow is the editor of city & country at The Edge Singapore.
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