Singapore Office Cap Rates Remain Stable
SINGAPORE – The capitalisation rates of office buildings in the city-state have remained remarkably stable, reported The Business Times on Monday afternoon (18 September, SGT).
These include the cap rates of two Grade A office buildings in Singapore’s Central Business District (CBD) – One Raffles Quay and Ocean Financial Centre.
Ocean Financial Centre’s capitalisation rate stood at 3.4 percent at the end of June 2023, while that for One Raffles Quay was at 3.5 percent. The former’s cap rate was unchanged from 3.4 percent at the end of December 2022 and a tad higher at 3.5 percent at the end of June 2022 and December 2021. As for One Raffles Quay, its capitalisation rate hovered at 3.5 percent at end-June 2022 and 3.45 percent at the end of December 2021.
The stable cap rates of Singapore office properties come even though interest rates across the globe have increased after the US Federal Reserve began raising interest rates in mid-March 2022. This has led to rise in capitalisation rates, which in turn resulted in a significant fall in the valuation of commercial properties in the United States, severely impacting the country’s commercial real estate sector, including the office market.
When interest rates are high, real estate investments are less appealing. Several years ago, one may have borrowed to buy a commercial property at an interest rate of 2.5 percent per year. If the asset’s net property income (NPI) yield is 4.31 percent and the acquisition is financed 50:50 by debt and equity, the NPI yield on equity rises to 6.12 percent. Conversely, when interest rate is at 4.5 percent, the NPI yield on equity falls to 4.12 percent.
Commercial property values are highly sensitive to the cap rates utilised to value the asset. A property with NPI of S$50 million is valued at S$1.43 billion using a capitalisation rate of 3.5 percent. Applying a cap rate of between 4 percent and 4.5 percent, valuation respectively declines by 12.5 percent to S$1.25 billion and 22.2 percent to S$1.11 billion.
Ultimately, falling property values negatively affect landlords. Loan contracts could be breached, thereby causing refinancing issues. Also, the mandatory gearing limits of listed property trusts could be exceeded.
