With all heads turned towards Europe and the US, and a sense of hesitation in the air, many property investors are shifting their focus from residential to commercial properties. But are property owners jumping ahead of themselves and setting the prices too high?

It has been taking longer to stitch investment sales deals for office blocks in recent months due to owners’ asking prices running ahead of the market, say property consultants.

Capital Square

According to Cushman & Wakefield, the average time on the market for office blocks has stretched from typically two to three months in H2 2010 and early 2011 to an average of four to five months these days. The last big-ticket office deal was Capital Square, which was sealed in March for $2,300 psf on existing net lettable area; its absolute price of $889 million has remained the largest deal size for an office block so far this year.

Cushman and Wakefield’s managing director of capital markets (Asia Pacific) John Stinson, who brokered that sale, believes it will ‘almost certainly retain the prize for the remainder of the year’. ‘Rising owner expectations are faced with a pullback from investors who see current asking prices too richly priced and out of step with acceptable rental growth expectations,’ he added.

The head of investment sales at a major property consultancy group said the dearth of big office transactions lately is due to pricing issues rather than the recent volatility in financial markets. ‘There is still appetite for Singapore offices from a variety of buyers, including Reits, other institutional investors as well as private investors from the region.’ ‘But deals are taking a bit longer to be done. If they’re correctly priced, deals can happen; if they’re incorrectly priced, they can’t happen,’ he added.

He reckons the office market may see greater clarity on pricing during the course of September, when expression of interest exercises for a few relatively palatably-sized buildings are scheduled to close – such as 135 Cecil Street and Robinson Centre.

Equity Plaza on Cecil Street.

Cushman said asking prices have been cited as $2,300-2,400 psf for locations like Cecil Street, Robinson Road and Cross Street, at the periphery of the Raffles Place CBD. Most office blocks in these locations are 10-20 years old and on sites with residual leasehold tenures ranging about 65-80 years, although there are also some 999-year and freehold properties.  ‘Asking prices are about $2,300-2,400 psf, but owners are apparently facing resistance for pricing exceeding $2,200 psf. And for larger transactions (in excess of $250 million), the hurdle seems to be closer to the $2,000-2,100 psf mark,’ says Mr Stinson.

‘For properties closer to the main Raffles Place square such as Market Street, Church Street and Phillip Street, there are reports of owners asking for $2,500-2,800 psf,’ he added. Jones Lang LaSalle’s Singapore and South-east Asia managing director Chris Fossick says there is a bigger pool of buyers for office blocks costing below $250 million – institutional players like property funds as well as private investors from the region.

Robinson Centre.

‘High net worth investors do not need to consider what institutional investors might need to such as Reits needing the investment to provide accretive income from the rental returns. ‘They’re not necessarily driven by internal rates of return. Instead they might say something like: ‘I like the Singapore dollar, the political stability and the 3-4 per cent yield on an office asset, which is higher than the cost of financing of around 2 per cent’.’

Private investors can also focus on the timeframe of their choice and do not need to base their investment decision on the short-term outlook, Mr Fossick added. Mr Fossick observes that Indonesians, who have historically invested in residential property in Singapore, are now diversifying into the office sector.

Cushman’s regional director (institutional investor group), Priyaranjan Kumar, said that ‘the intrinsic office market fundamentals remain healthy with Singapore poised for healthy rent growth for prime CBD office space averaging in the double digit per year until 2014 – due to current supply-demand dynamics’. CB Richard Ellis data show that total investment sales for offices in the first half of this year totalled about $2.9 billion. The figure for the whole of last year was $7.2 billion.

Wealthy investors are dipping into the commercial property market in Singapore. Image Courtesy of Singapore Tourism Board.

The property consulting group’s analysis also shows that between Q3 2009, when the market bottomed out after the global financial crisis, and Q2 this year, about $51.3 billion was invested in Singapore real estate. But only 3.5 per cent of this came from outside the Asia-Pacific region.

Source: The Straits Times © Singapore Press Holdings Ltd. Reprinted with permission.

Editor’s Commentary:
Although the commercial sector is certainly look set to grow, it depends on when the growth spurt might be. Match property prices to the current rental market and you will be able to see if putting your eggs in the commercial property basket will hatch you a pot of gold.