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Singapore office market to revive as supply eases, Hong Kong firms show interest

SINGAPORE (Nikkei Markets) - Singapore's market for office properties could be poised for a turnaround with the optimistic pricing in some recent deals suggesting owners are positioning for higher rents in the near future.

Data from official and private sources show the number of new office projects will tail off sharply after 2017, potentially easing the pressure on rents in the central business district and ending a decline that began two years ago.

The most recent high-profile transaction involved CapitaLand Commercial Trust, Singapore's largest office landlord, which is managed by CapitaLand, Southeast Asia's biggest developer by assets. On Tuesday, CCT sold a 50% stake in a prime office building to Hong Kong insurer FWD Group at a price that was 16.7% above the property's valuation in December. The deal values One George Street, a 23-storey development, at 1.183 billion Singapore dollars ($850 million).

Just three months earlier, a wealthy Chinese businessman agreed to pay S$725.2 million for a holding company that substantially owns GSH Plaza in the financial district, leading to a chunky profit for its current owners.

The consortium that sold GSH Plaza to Ji Changqun, who controls Hong Kong-listed Fullshare Holdings, paid S$550 million for the 28-storey building in 2014 and spent an additional $100 million on refurbishment. Several of the units in GSH Plaza are now owned by individual investors.

"Typically, Singapore goes through periods of 'too much' and then 'too little' office space," said Jeremy Lake, executive director for capital markets at CBRE in Singapore. "We are mostly over the 'too much' period," he said, adding that some five in 10 investors now subscribe to the view as compared to a year ago when it was shared by just one in 10 investors.

CBRE has a positive view on the Singapore office market, he said, referring to the better-than-expected take-up of space at new and upcoming projects. He added that rents at high quality Grade A buildings could start recovering as early as in the second half of 2017.

Office rents in Singapore fell 3.4% in the first quarter of 2017 from the preceding three-month period, extending a decline that began in the second quarter of 2015, according to data from the Urban Redevelopment Authority last week.

Prices for office space fell a sharper 4.0% after edging down 0.6% in the previous quarter.

Analysts believe Singapore's office market is at or near its bottom in terms of capital values, although rents could continue falling for several quarters.

According to figures compiled by CCT, the supply of new office space in the central region, including the major shopping and business areas and the periphery, is expected to fall to around 800,000 square feet in 2018. That's down sharply from 2017's 2.3 million square feet and 2016's 1.9 million square feet. The supply will drop further to 600,000 square feet in 2019, CCT said, citing historical data and estimates from URA and CBRE.

"With office supply slowly tapering off post-2017, we expect rents to bottom out this year and start rebounding in 2018," RHB Research, which supports the stockbroking arm of Malaysia's RHB, said in a recent report.

Looking ahead, CBRE's Lake said office values in Singapore could get a lift from both the recovering economy as well as demand from investors in Hong Kong that are looking to diversify geographically.

Asset prices in Hong Kong have risen in recent years even as Singapore's have flatlined. For instance, rents in Hong Kong's prime Central area are now roughly triple that of Raffles Place, Singapore's financial hub. In valuation terms, recent transactions in Hong Kong have taken place at net property yields of 2% to 2.5% per annum compared to around 3.5% in Singapore.

Net property yield measures the expected rental income from the property after deducting various costs relative to the purchase price. One George Street, for instance, was sold at a net property yield of 3.2%.

Other recent deals in Singapore involving a Hong Kong-based buyer include Shun Tak Holdings' acquisition of a stake in TripleOne Somerset, an office complex off Singapore's Orchard Road shopping district. Shun Tak, controlled by Macau casino magnate Stanley Ho, paid S$305 million for the stake.

Singapore's economy expanded by a better-than-expected 2% in 2016, and Prime Minister Lee Hsien Loong said earlier this week that there is a "good chance" growth this year will be higher.

Taking a more nuanced view of prospects, Christine Li, director of research at Cushman & Wakefield, said demand for office space could remain below historical levels due to the growing popularity of co-working spaces and business parks located outside the city center, putting pressure on rents.

"There is a structural shift in the office rental market. While premium quality buildings in the heart of the CBD have been well-received by large occupiers, lower quality and older buildings with low efficiency in the city fringe have come under immense pressure to keep pace with the changing needs," she wrote in a report last week.

As for capital values, Li said they are likely to stabilize in coming quarters.

According to recent reports, CapitaLand is poised to buy an office tower in Singapore's prime Marina Bay financial district at a higher price per square foot than what Qatar Investment Authority paid for an adjoining tower in June last year.

The sovereign investor from the Middle East paid a Blackrock property fund some S$3.4 billion for Asia Square Tower 1, in one of the biggest property deals in Asia in 2016. Asia Square Tower 2, in which CapitaLand is reported to be interested, would likely fetch around S$3.3 billion, as it contains less office space, the reports said.

--Kevin Lim

--Nikkei Markets is a real-time financial news service for South East Asia's markets published by Nikkei NewsRise Asia Pte Ltd, a Nikkei and NewsRise joint venture company. Nikkei Markets provides wide companies coverage in the region, including the Nikkei's Asia300 companies.

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