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COMMERCIAL PROPERTY | Krisana Gallezo-Estaura, Singapore
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What are the implications of the successful sale of Asia Square Tower 1?

Here's why analysts are still cautious.

Asia Square Tower 1, located in downtown Central Business District has reportedly been sold to Qatar Investment Authority (QIA) for a record price of S$3.4 billion (US$2.45 billion). This translates into a price of approximately S$2,650 -$2,700 psf for the premium office development, which was completed 5 years ago in 2011.

According to DBS analyst Derek Tan, assuming the average rent is S$10-11psf, this implies a net yield of 3.1-3.2% for the tower which comprises of close to 1.2 million sqft of office space and 40,000 sqft of retail area.

Christine Li, Research Director, Cushman & Wakefield (C&W) commented that Asia Square Tower 1 is one of the most sought-after trophy assets by regional and international investors given its premium location in the heart of Marina Bay, Singapore's pre-eminent financial and business district.

According to Li, 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 psf - S$3,000 psf range ended inconclusively.

"This price is comparable to the transaction of Marina Bay Financial Centre (MBFC) Tower 3 in 2014, where Keppel Land sold 1/3 stake to K-Reit at $2,680psf. However, the price pales in comparison to the recent transaction by Straits Trading building, which was sold to MYP controlled by Indonesian Tycoon Dr Tahir, at $3,520psf as it is a 999-leasehold and 100% fully occupied office building," she explained

According to C&W research, Asia Square Tower 1's current occupancy is around 91%, for both the office and retail portions.

Implications
Sector-wide, Tan notes that that the successful sell out of Asia Square Tower 1 have positive implications on Singapore as an investment destination for global investors.

"QIA is likely to be taking a longer-term view on its investment horizon given that it is acquiring the property with possibility of vacancies rising to c. 20% in the near term given expected tenant relocations. This is a further testament of the attractiveness of Singapore as an investment destination, supported by stable Singapore dollar (SGD) compared to regional currencies," he said.

Tan adds that for patient investors, taking a view that current office weakness in rents is a function of a cyclical oversupply in completions over 2016-2017, the medium-term outlook remains robust given limited completions after 2019, implying a office squeeze once again then.

Li concurred while adding that while office investment volume had come down significantly in the past year, the recent big-ticket transactions of Straits Trading Building and now Asia Square Tower 1 may give the market a shot in the arm and give other long-term investors confidence to venture forth and place bids for their desired properties.

"We believe that the Asia Square transaction could spur investors' interest, particularly those from sovereign wealth funds and insurance companies in the city-state, as Singapore is known for its ability to attract long-term investors looking for wealth preservation given the stable political landscape and strength of the Singapore currency," she said.

Li also noted that the scarcity of the tradable Grade A assets is the reason why investors will have to contend with a low yield and a price premium. Over the last 10 years, the proportion of tradable assets is merely 7%, of which more than 50% is related party transactions, she said.

Nevertheless, Li cautioned that the office leasing market faces challenges in the short term due to weak business conditions, with leasing demand impacted by headwinds in the banking, oil, and commodities sectors.

"The supply overhang of 3.55 million sf scheduled for completion in 2016 will likely lead to the Grade A CBD vacancy rate exceeding double digits by the end of the year. Accordingly, Grade A CBD rents are projected to moderate by a further 10–12% in 2016, but stabilise in subsequent years given the significantly reduced supply pipeline in 2017 and 2018," she explained.
 

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