Harbinger of hope – Qatar Investment Authority's purchase of Asia Square Tower One

By Istvan Loh

The recent acquisition of the 43-storey Asia Square Tower One by Qatar Investment Authority, a sovereign wealth fund, has provided the flagging Singapore real estate market with a much-needed shot in the arm.

Asia Square Tower One was sold by BlackRock, the world’s largest asset manager, for US$2.5 billion ($3.4 billion), a record for Singapore. According to reports, the effective selling price of $2,700 per square foot was lower than what BlackRock had initially hoped to get.

Talks had been held with CapitaLand, Singapore’s biggest developer, and subsequently with ARA Asset Management, a property fund management specialist. But the deal was finalised with the Qatar Investment Authority (QIA) wealth fund, which has invested about US$38 billion in properties around the world.

In addition to Asia Square Tower One, BlackRock also owns Asia Square Tower Two, which is located on an adjoining plot. A story carried in Bloomberg states that both the towers are 90% occupied and that vacancies in the area are below 4%.

Office rentals in the central business district – A recent report in the Financial Times states that approximately 3.6 million square feet of additional office space will be added in the central business district in 2016. The new Marina One, located very close to Asia Square Tower One, will offer 1.88 million square feet for lease.

In the Marina Bay area, office rents fell by 20% last year. A further decline of 10% to 12% is expected in the current year.

Rental Index of Office Space in the Central Region

Source – Urban Redevelopment Authority

According to Sigrid Zialcita, managing director of Asia Pacific research at Cushman & Wakefield, the over-supply in the office space market will lead to vacancy rates jumping to 14% this year from a level of 10% at the end of 2015.

But Ms. Zialcita is of the view that the excess of supply over demand and the falling rentals are a temporary phenomenon. She says, “The upside is that we have seen a growing diversification in tenancy, with increased demand, especially from new technology, asset management services, and insurance sectors.”

Slump may not be as bad as it appears – The head of Asia-Pacific region for BlackRock Real Estate John Saunders says, “There has been a lot of near-term negativity on the Singapore market.

“I think it’s a little bit overdone. There is some new stock coming on, but what tends to happen in Singapore is you get a piece of supply that temporarily can disrupt the market, but then demand is usually pretty strong.”

In fact, according to Mr. Saunders, investors who have ‘dry powder’ and are looking for a suitable opportunity will find that the current situation in Singapore’s commercial real estate market presents some good options. BlackRock itself is open to making new investments.

The sale by BlackRock has followed two other large transactions, giving credence to BlackRock’s assertion that the pessimism about the property sector may be misplaced. In the first transaction, CapitaLand Commercial Trust proposes to acquire the remaining 60% stake that it does not own in the CapitaGreen office tower for $393 million.

The valuation for this deal is at a rate of $2,276 per square foot, putting it lower than the Asia Square Tower One transaction. The building has an area of 703,000 square feet. Its occupancy rate was about 93% as of March 31.

The second transaction is the purchase of the Straits Trading Building in the Raffles Place financial district at a price of $560 million. The buyer, Tahir, also known as Ang Tjoen Ming, is the Indonesian Chinese founder of the Mayapada Group.

The Straits Trading Building has been purchased from Singapore real estate developer Sun Venture Group, at an effective rate of $3,520 per square foot.

Revival of the commercial property market – Many market-watchers hold the view that the situation in the real estate market for office space will improve. But the timing of the turnaround is uncertain.

The Singapore government’s land use planning and conservation body, the Urban Redevelopment Authority (URA), tracks property-related data for various segments of the real estate market. The data it has released for the first quarter of 2016 show that both the price index and the rental index have fallen in the January-March period.

While real estate prices for office space declined by 0.3% over the last quarter of 2015, the rental index fell by 2.1%.

But on a more positive note, URA’s data reveal that the vacancy rate fell from 9.5% in Q4 2015 to 9.2% in Q1 2016.

The record Asia Square Tower One deal could be the first sign of a revival in the office space market. Mr. Saunders of BlackRock says, “I have a feeling we might look back at this point and say ‘that marks the recovery point’ for the market.”

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