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With long term capital appreciation focus instead of yield driven transactions
SINGAPORE, 29 June 2009 - Following a lacklustre investment sales market in 1Q09, the second quarter registered a near 2.6 times increase in total investment sales volume. According to preliminary data, a total of approximately S$834.8 million worth of investment assets was transacted in the April-June quarter. This quantum is approximately 80% lower on a year-on-year comparison.
The residential sector dominated the investment sales market, accounting for slightly more than half of the total private sector sales of S$479.5 million. Transactions of Good Class Bungalows and other landed properties formed the majority - a total of 12 Good Class Bungalows was transacted in 2Q09.
On the commercial investment front, four significant transactions were concluded this quarter, with the latest being the sale of The Village Centre and an adjoining plot of land from Ridge Investments to Hume Homes Pte Ltd for S$23 million. In May, Parakou Building was sold by New Star Asset Management Group to the Cathay Organization for S$81.38 million; Anson House was sold to a group of high net worth individuals from a fund managed by Macquarie Bank for S$85 million and VTB Building was sold by VTB Capital to a joint venture of Yi Kai Group and Fission Group for S$71 million.
These recent transactions suggest a shift in the investment climate where affordability remains a key factor as palatable deals below S$100 million are more likely to be concluded. Investor’s profile has also changed. The yield-driven institutional investors which dominated the investment market over the previous years are unlikely to lead the investment charge this time round. Uncertainty in the global market has put pressure on yield expectations of these institutional buyers. But with rentals falling quicker than capital values; our compressed yield did not appeal to their lowered risk appetite. Computed market yield (defined as current rentals over current capital values) of commercial office stock which recorded some 5.0- 6.0 % between 2007 and 2008 has compressed to 4.5 - 4.8% by 1Q09 on the back of softer demand and landlord’s weakened confidence in the leasing market. Some institutional investors we understand are looking at yields of between 6% - 7% before they are willing to enter into the market today.
Typical investors active today include high net worth private investors, family businesses as well as a handful of medium sized private equity funds. They have a medium to longer term investment mandate and are seeking gains from capital value appreciation either from a change of use or from the long term market cycle. They are more accustomed to lower income yield as they look towards total return.
The S$25.9mil worth of Government Land Sales sites transacted in 1H09 is the weakest showing of any first-half yearly performance after the lowest level of S$3.64 mil was recorded in 1H98 during the Asian Financial Crisis. In percentage terms, this reflects a 96% decline from the level recorded six months ago i.e. in 2H08, and is the largest half yearly decline recorded, similar to that in 2H99.¹
A significant milestone in this quarter would be the award of a site from the Government Land Sales Reserve List after a 9-month hiatus. In June 2009, the hotel site at Short Street was awarded to the highest bid of S$15.51 million by Fragrance Assets Pte Ltd. Incidentally the last GLS site awarded in October 2008 was also another hotel site, located along Kallang Road / Jellicoe Road. This may indicate an overall confidence in the hospitality sector, especially with the opening of the two Integrated Resorts round the corner. Most recently, a hotel site at New Bridge Road from the Reserved List was triggered for public tender. Given the lead time of some two to three years for completion of the project, developers are more confident of the economic conditions in Singapore in 2012 and beyond. With construction costs easing, we expect interests for GLS sites to slowly trickle back into the market, albeit more cautious bids.
Our outlook for the investment market remains cautiously optimistic. Without a full recovery in the general economy, investors’ purchasing appetite is expected to remain lukewarm and bite-sized assets will be favoured, especially discounted assets with a strong reversionary potential, long-term anchor tenants and potential capital value growth.
Dr Chua Yang Liang, Head of Research, South East Asia at Jones Lang LaSalle thinks that while residential activity in Singapore has increased somewhat, the overall weakened global investor confidence is likely to cast a shadow over the Singapore office investment market where yields tend to be lower than other developed markets. Transactions are likely to remain sporadic until there is an affirmative rebound in confidence set by a global economic updraft.
Stella Hoh, Local Director of Investments at Jones Lang LaSalle says, “Buoyed by the recent increase in investment sales, sentiments have improved albeit cautiously. There is still liquidity in the market and we expect this market to improve with more transactions expected by end of the year.“
¹ we have used a six month period as a basis of comparison to provide a more realistic timeframe in reading market responses to external shocks
Chua Yang Liang
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