Sales of Singapore Prime Office Buildings Most Impacted By Rising Interest Rates
SINGAPORE – Market watchers revealed that the real estate segment most affected by rising interest rates is the office sector, primarily institutional-grade prime office buildings, according to a recent report from The Edge.
According to Savills Singapore’s Managing Director of investment sales and capital markets, Jeremy Lake, deals involving large office properties costing at least S$500 million have halted with institutional purchasers moving to the sidelines.
“It’s harder to underwrite such deals as interest rates are much higher now,” he explained.
Cushman & Wakefield’s Executive Director of capital markets Shaun Poh concurs. “When we were marketing a few properties in June, the three-month compounded Singapore Overnight Rate Average (SORA) was at about 0.6 percent to 0.7 percent.”
“Today, the three-month compounded SORA is close to 2.6 percent, which means financing costs are near 4 percent,” he said, adding that it will be hard to convince investors to buy a core Grade-A office tower at 3 percent yield.
This is why a number of sizeable office transactions have been terminated over the past few months, including S$680 million disposal of the 15-storey Bugis Junction Towers and the S$900 million divestment of 24-storey Parkview Square. Both commercial property deals were said to have been at the due diligence phase when they were impacted by the “challenging interest rate environment”, particularly when the pace of SORA increases accelerated in late-September and early-October.
Another failed office property transaction was the 35-storey Robinson 77, which was launched for sale by expression of interest (EOI) at S$898 million. A source shared that although there were offers received at the close of the exercise in April, it was below the seller’s price expectation.
Two office properties – Asia Green and 78 Shenton Way – were also launched for sale by EOI several months ago. But not a single buyer came out at the close of the EOI for both assets due to a gap between the would-be buyers’ offers and the sellers’ targeted price.
CBRE Singapore Head of capital markets Michael Tay disclosed that investors are looking at the office market closely as they await the stabilisation or tapering off in interest rate hikes. On the demand side, investors are waiting for “more signs of positive rental reversions.”
Looking ahead, Cushman & Wakefield’s Poh thinks that major office transactions would be limited in the next six months in Singapore until at least the 1st quarter of next year.
“Sellers are taking their assets off the market and waiting until they see greater clarity in terms of interest rate direction. Buyers are already behaving opportunistically and making offers that are substantially below the seller’s price expectation.”
On the other hand, he expects deals involving office properties priced between S$100 million and S$200 million price would continue. For instance, the property consultancy launched the sale of Serene Centre at a reserve price of S$120 million on 28 September shortly before the Singapore Grand Prix F1 weekend. And Cushman saw overwhelming response, receiving enquiries from offshore funds and super wealthy locals.