Singapore Office Investment Sales

Singapore Office Investment Sales Hit S$7.04bil In 2022

SINGAPORE – Data from Savills Research showed that office investment deals in the city-state rose to S$7.04 billion as of 21 December compared to S$5.16 billion for the whole of 2021, reported The Business Times on Thursday morning (29 December, SGT)

The tally only covers office investment transactions with a minimum price of S$10 million. It also excludes Singtel’s S$1.63 billion sale of its HQ in Exeter Road in Q2 2022 to a joint venture (JV) with Lendlease. Savills will only include that deal after the JV makes actual payment to Singtel by 2024.

While Singapore’s office investment transactions increased year-on-year, the volume declined sharply from the 3rd quarter of the year. In Q1 2022, office investment deals in the city-state reached S$4.7 billion, then it fell to S$1.87 billion in the 2nd quarter, S$251 million in Q3 2022, and S$196 million as of the 4th quarter.

This indicates that the market for big-ticket office properties is heading to a slow start next year, after a sluggish performance in the last two quarters of 2022.

One factor behind the sharp decline in office investment sales is the high interest rate environment. And this is expected to deter institutional investors from buying office assets in the near term, as borrowing costs have surpassed office yields, noted market watchers.

“Institutional buyers will probably watch and wait for a few more months, for visibility on interest rates peaking before jumping in,” said Savills Singapore’s Managing Director of investment sales & capital markets, Jeremy Lake, who added that asking prices in some cases probably overshot the market and this turned off buyers.

“In January, investors could borrow at 1.5 percent all in and office net yields were around 3 per cent, so it was all good. Today, borrowing costs range from 4.5 percent to 5 percent, all in. So, 3 percent office yields don’t work,” he explained.

Another factor pointing to a dearth of large office transactions in the coming months is the buyer-seller price mismatch and the lack of distress sales.

“CBD Grade A office rents have been on an uptrend, and coupled with low vacancy rates, sellers are not incentivised to lower their asking prices. On the other hand, borrowing costs rising rapidly to levels above office yields have pulled institutional investors such as core investment funds to the sidelines, as they await greater clarity and more attractive pricing,” elucidated Cushman & Wakefield’s Research Head in Singapore Wong Xian Yang.

Amidst higher financing costs and still-low yields of stabilised office properties, he reckons that investors seeking higher returns may have to scout for value-add opportunities (i.e. assets that can be potentially redeveloped or upgraded).

They could also extend their search to non-core central business district (CBD) office submarkets like Bugis, Orchard, and City Hall, in addition to decentralised office markets such as Jurong, Paya Lebar, Tampines and Harbourfront/Alexandra, where there is potential for office rents to be readjusted higher.

Even though institutional investors are expected to stay on the sidelines on the near-term, Wong expects family offices and super wealthy individuals to continue making smaller-sized investments, like stratified office units and compact office buildings in Singapore’s CBD.

“Many of these investors have deep cash reserves and are able to finance the deal in full cash or take up smaller loans; they are investing for wealth preservation or diversification.”

Savills’ Lake also expects more investors from China, aside from a trickle of super wealthy individuals from Europe who would be interested in strata offices and smaller office buildings here.

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