Foreign investors flock to recovering office market

 

 luxuryasiahome on November 14, 2010 

Foreign investors are streaming into the local office market, attracted by the prospect of increasing values and returns that might be sweetened by a stronger Singdollar.

Investors – many from China – are keen on high-quality strata-titled offices, which allow them to buy, say, one office storey rather than a far more expensive entire building.

The office segment has turned a corner since the financial crisis dragged prime office rents down last year by more than 40 per cent compared to 2008.

So far this year, third-quarter rents in the central areas are up by 13.5 per cent, according to the Urban Redevelopment Authority, though they are still 17 per cent under their 2008 second-quarter peak.

Savills Singapore has handled about one third of the deals worth $5 million to $50 million involving investment-grade office space this year. It says all of its six deals involved foreign buyers, up from two out of three last year when the market was slower.

Inquiries from foreign investors have also shot up by 20 per cent. The firm expects that to translate into a rising number of foreign clients betting on this segment of the strata-titled office market.

Sought-after office space includes Suntec City, Springleaf Tower in Tanjong Pagar and The Central at Clarke Quay.

An analysis of Savills’ client base for core central business district (CBD) deals in this price bracket showed that wealthy foreign buyers, family office funds or club buyers – typically groups of friends – made up the majority of investors.

Savills executive director of investment sales Steven Ming said he has seen more offshore investors, predominantly from mainland China, Hong Kong and Taiwan.

‘They’ve been investing in this market over the past 12 to 18 months but we’re starting to see a heightened increase in the number of inquiries from foreign investors who are hoping to participate in the office market,’ he added.

Another group of buyers: Foreign and local small and medium-sized enterprises which aim to occupy the space. They can borrow cheaply, given the low interest rates, and this protects them from rent rises.

A further attraction for local buyers is that office investments are unaffected by the Government’s recent property cooling measures.

The profile of some of these investors is similar to that of buyers of good-class bungalows (GCBs) as the sums involved are similar, Mr Ming added. ‘Foreigners can buy office space, so unlike limitations to GCBs, it’s a little bit more liquid because the world is your market,’ he said.

Although buyers of office buildings tend to be institutions, private equity funds, sovereign wealth funds and real estate investment trusts, non-corporate investors have pumped in sums of $5 million to $30 million in this type of office space in core CBD locations this year.

Suntec City’s largest floor plate, for example, is about 14,000 sq ft. Prices generally start from $2,200 per square foot (psf) and would set an investor back by about $30 million.

Strata-titled offices are a cheaper option for buyers who are not able to pay more than $200 million for an entire building, Mr Ming said.

‘Investors have been buying because there is a lot of liquidity in the market courting limited investment-grade real estate assets.’ He said quite a few clients had bought office space this year which is returning 4 per cent a year in rent.

Office values could rise 5 per cent to 15 per cent next year and the returns for a foreign investor could be sweetened by further Singdollar gains as well, Mr Ming added.

The largest investment-grade deal under $50 million this year was a 2,003 sq m space at GB Building in Cecil Street at $30.5 million – or $1,415 psf. Suntec City, however, saw the most $5 million to $50 million deals, with 10 out of the 19 transactions occurring there, according to Savills.

Mr Ming said the average price for all strata-titled deals this year worth $5 million to $50 million was $1,631 psf, up 19 per cent from $1,375 psf last year.

Some investors are already cashing in their steep gains, though this is not widespread given longer term horizons.

A 10,742 sq ft office space at Springleaf Tower, for example, was sold for $17.89 million in September, seven months after it was purchased for $13.38 million.

Investors in Suntec City have also benefited from rocketing prices, with a 2,928 sq ft office space on the 40th floor of Tower Three selling for $2,450 psf, or $7.2 million, in September – 30 per cent more than when it was bought for $1,888 psf, or $5.5 million, in July last year.

Mr Ho Eng Joo, executive director of investment sales at Colliers International, said his firm is also getting more inquiries from overseas investors. ‘Office values are still below their peak and, with rents expected to pick up in the future, overseas investors might see the office market as an alternative to investing in the residential market.’