Prime office capital values in Singapore are set to rise over the next 12 months in anticipation of rental rate increases, fuelling interest among foreign investors in the office market, according to Jones Lang LaSalle (JLL).
“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,” said Chris Archibold, head of markets at JLL.
Most of these potential foreign investors are European funds, mainly from the UK and Germany, while investors from the US and Middle East are among the other key groups of overseas investors keen in the Singapore office market, added Mr. Archibold.
JLL is expecting the average capital value of Prime Grade A Raffles Place office space to increase $1,800 psf by end-2010, up from $1,700 psf in Q1 this year.
Chris Fossick, JLL’s MD for Singapore and South-east Asia, added that office capital values are expected to increase further in 2011, as rental rates recovery gathers momentum amid strong economic fundamentals in the country and in the Asian region.
Office rents in the country have started to look brighter. Mr. Archibold predicted that for the whole of 2010, the average monthly rental value of prime Grade A Raffles Place could surge by five percent, given that the situation of the global economy remains 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,” said Mr. Archibold.
About 1.3 million sq ft net lettable area of existing office space is expected to be taken out from the market, assuming that the government grants approval for redevelopment, which is mostly for residential use. Office space which is expected to be removed from the market includes the VTB Building, North Bridge Commercial Complex, UIC Building and Marina House.
Leasing activity for new office space also began to pick up in the third quarter last year. “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,” said Mr. Archibold.
This news may entice several investors to purchase office space, but not everyone who is sniffing out office transactions is considering the rental and leasing recovery story.
Jeremy Lake, executive director (investment properties) at CB Richard Ellis, stressed that two distinct 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.”
Over $1 billion of Singapore office investment sales across both types of buyers have been sealed since last year, including Anson House, Parakou Building, 1 Finlayson Green, Marina House, VTB Building and Robinson Point.
According to JLL, office investment volumes across Asia-Pacific have picked up since mid-2009, 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,” said Megan Walters, JLL’s head of research for Asia Pacific Capital Markets.