(SINGAPORE) The Republic's prime office capital values are poised to rise over the next 12 months in anticipation of rental increases. This is fuelling interest among overseas investors in the Singapore office market, says Jones Lang LaSalle.
'The number of investors coming to town and looking at offices has multiplied radically in the past three months. Most are looking to invest in a 12-18 month window rather than necessarily immediately,' says JLL's head of markets Chris Archibold.
These potential overseas investors are mostly European funds (primarily from Germany and the UK). Middle Eastern and US investors make up the other key groups of foreign investors keen on Singapore offices, he added.
JLL is forecasting that the average capital value for Prime Grade A (Raffles Place) office space will rise to $1,800 per square foot by the end of this year, up from the Q1 2010 figure of $1,700 psf. This is the level where capital values have stabilised since Q3 last year.
Office capital values are expected to appreciate further next year as the rental recovery gathers momentum amid strong economic fundamentals in Singapore and Asia, says JLL's MD for Singapore and South-east Asia Chris Fossick.
The picture for Singapore office rents has already started to brighten. Mr Archibold forecasts that for the whole of this year, the average monthly prime Grade A Raffles Place rental value could increase by about 5 per cent; growth will be limited by sentiment, given that the global economic situation is still pretty fragile.
'Notable leasing deals are expected to be completed over the next few months and this, combined with the trend of redeveloping CBD buildings into residential use, may see sufficient rebalancing of supply and demand for rents to stabilise over the next three to six months,' says Mr Archibold.
An estimated 1.3 million sq ft net lettable area of existing office space is expected to be taken out from the market assuming government approvals for redevelopment - mostly to residential use - are granted. The stock expected to be removed from the market includes Marina House, VTB Building, UIC Building and North Bridge Commercial Complex.
Leasing activity for new office projects began to pick up in Q3 last year. Mr Archibold says: 'We are aware of eight to 10 occupiers, studying potential leasing deals of about 100,000 sq ft each, that are now looking at their options.'
While such news may entice some investors to buy office space, not everyone who's sniffing out office deals these days is eyeing the leasing and rental recovery story.
CB Richard Ellis executive director (investment properties) Jeremy Lake highlights that two discernible profiles of investors have emerged in the Singapore office market over the past year.
'The first are those who intend to buy an office building and develop it into alternative use, mostly residential to cater to current strong demand for homes in the CBD. This group typically comprises residential developers that are targeting older Grade B office blocks, which are thus gaining a new lease of life from their latent value arising from residential development potential.
'The second group - which would include Singapore Reits and European and Asian property funds - are keen on high-quality office buildings for their rental income and capital appreciation potential given the office rental recovery underway.'
The second profile reflects the traditional reason for buying offices in Singapore.
More than $1 billion of Singapore office investment sales - cutting across both types of buyers - have been sealed since the beginning of last year. They include Parakou Building, Anson House, VTB Building, 1 Finlayson Green, Robinson Point and Marina House.
According to JLL, office investment volumes have picked up since the middle of last year across the Asia-Pacific, and capital values have bottomed in most markets. 'Foreign and domestic investors looking to buy based on rising rental income have a choice of markets to consider including Hong Kong, Singapore, Shanghai and Melbourne. Rents are likely to move upwards in these cities with capital values following in line over the next 12 months,' says Megan Walters, head of research for Asia Pacific Capital Markets at JLL.
JLL's Q1 Office Investor Rental Weather Map for Asia-Pacific shows that the sunniest point on the map is Hong Kong, where the pace of recovery in the Grade A office leasing market appears to be faster than expected. 'Demand has been driven by consolidation and from PRC companies looking to set up in Hong Kong,' Dr Walters said.
In Singapore, the average monthly prime Grade A Raffles Place rental value for small space users (2,000-5,000 sq ft) dipped 0.6 per cent quarter on quarter to $7.75 psf in Q1 2010.
'We have yet to finalise the Q2 rental trend numbers but we fully expect to see a reversal in the downward rental trend,' says Mr Archibold. 'Assuming a growing economy, we expect rents to increase at a moderate pace for the remainder of 2010 and to pick up more rapidly in 2011 and 2012.'
Source: Business Times, 10 Jun 2010