Wednesday 29 October 2008

Singapore Office Market May Face Foreign Funds Sell-out

Foreign funds have given a big boost to the office market in Singapore, snapping most of the properties on sale last year. Now they could be the ones pushing the sector down.

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Guanyu said...

Singapore Office Market May Face Foreign Funds Sell-out

By Patricia Kowsmann
29 October 2008

Foreign funds have given a big boost to the office market in Singapore, snapping most of the properties on sale last year. Now they could be the ones pushing the sector down.

Tight supply and high demand, mostly from financial institutions, has made Singapore one of the most expensive office markets in the world. Rents nearly doubled on-year in 2007, after increasing more than 50% in 2006.

Strong rent returns led many foreign investors to buy existing office buildings on the island, sometimes at record prices. According to ABN Amro, foreign property funds accounted for 71%, or S$10.4 billion, of office investments last year.

Capital values, however, have been falling because of the credit crisis and economic uncertainty. Analysts are projecting office rentals could fall 25% by the end of next year and another 30% by end of 2010, which would drag down asset values by 30% to 40% over the next three years.

As some investors face lower returns, possible fund redemptions, pressure to refinance debt and other cash needs, analysts say office sales at even lower prices are likely. That, in turn, should depress prices further.

“The strong participation of foreign funds last year was instrumental in driving up capital values in prime office and high-end residential assets. The reverse could occur when these funds unwind their positions,” said ABN Amro analyst Fera Wirawan in a note.

According to Wirawan, funds may need to sell the properties because of increasing financing costs, to shore up their balance sheet or to simply cut losses “as the outlook in the Singapore property market has turned bleak.”

In addition, quick “flipping” of office assets was common last year, signalling many of them aren’t long-term players.

For instance, late last year, private equity real estate fund Macquarie Global Property Advisors sold 12 floors in a city-centre building it bought in January to Germany’s SEB Asset Management.

MGPA, owned by its senior management team and the Macquarie Group Ltd., reportedly bought the building for S$134 million and sold it for S$225 million.

While quick profits were the reason for sales last year, this time funds could be looking to unload assets that are losing their value.

Indeed, some investors are quietly testing the market to see how much their properties would fetch now.

A unit of MGPA has unofficially looked for buyers for a building in the island’s city centre, people familiar with the situation say.

The unit bought Temasek Tower from developer CapitaLand Ltd. early last year for S$1.04 billion. Analysts say although the building would have to be sold at a discount now, the firm will likely be getting more than it would two to three years from now, as prices are expected to keep falling.

In an emailed statement, MGPA said it has recently completed refurbishment initiatives in the building, which “remains a long-term investment.”

Other big buyers into Singapore’s office market in 2007 and 2008 included Goldman Sachs-linked funds, which acquired two buildings for S$1.5 billion total and SEB Asset Management, which besides the floors it bought from MGPA, invested S$740 million in two buildings last year.

Goldman Sachs Group Inc. (GS) declined to comment. SEB Asset Management said most of its funds hold assets from medium to long term.

“We are not traders, and we do not intend to sell any of the properties near term, but we review and rebalance our portfolio on a regular basis,” it said, adding it is evaluating other opportunities in Singapore.

Still, nobody is expecting fire sales in the island. For one, tight credit markets make it difficult and expensive for potential buyers to get financing. In addition, these players expect discounts many potential sellers aren’t ready to give, at least not yet.

But foreign real-estate funds have been putting property up for sale in other markets facing prospects of a downturn, including Shanghai and Hong Kong.

In addition, analysts say, it wouldn’t take many buildings being sold at a discount to drag the market down.

“Especially given the fact that over the last three to six months there haven’t been many transactions here, any sale would set a price point that would be used as a benchmark,” said Kim Eng analyst Wilson Liew.