New Reporter
13-07-23, 12:24
Post-pandemic, connectivity and compact homes ensure quality offices and malls maintain relevance
Jul 10, 2023
OFFICE buildings in many cities are struggling. As remote working gets entrenched, demand for office space has shrunk.
Singapore-listed Manulife US Reit : BTOU +0.6%, which owns office buildings in the United States, recorded a drop in portfolio valuation of about 10.9 per cent at end-2022 versus end-2021. The valuation of the trust’s Figueroa in Los Angeles, which is affected by high vacancy, fell by 33.1 per cent.
There are fears that rising vacancy rates in office buildings in the US, coupled with high interest rates, could lead to some office landlords collapsing, thereby potentially sparking a financial crisis.
Meanwhile, some malls in the US and elsewhere have shut down, partly due to consumers shopping online because of greater convenience and possibly lower prices.
However, major office and mall landlords here are doing fine. Generally, the valuation of CapitaLand Integrated Commercial Trust’s : C38U +2.08% (CICT) Singapore office, retail properties and integrated developments rose between end-2021 and end-2022.
https://i.imgur.com/9dXg3U1.png
For the first quarter, average incoming rents for CICT’s suburban malls and downtown malls rose 5.3 per cent and 7.2 per cent, respectively, versus average outgoing rents. Tenant sales per square foot for CICT’s Singapore retail portfolio rose 10.2 per cent year on year in Q1, and is higher than pre-pandemic levels in 2019.
As at end-March, the committed occupancy of CICT’s Singapore office assets was nearly 97 per cent. For Q1, the trust posted positive rent reversion of 4.2 per cent on its Singapore office portfolio.
Certainly, the growing ease of remote working and online shopping have upped the ante on office and retail landlords here to avoid complacency and delight customers.
Nonetheless, some factors that are specific to Singapore help drive long-term demand for office and retail space here.
Demand drivers
First, many people live in compact homes. A couple with two kids may live in a three-bedroom condominium unit of under 1,000 square feet that costs S$1.5 million to S$2 million, or a Housing and Development Board flat of roughly similar size. And the average size of three-bedroom condominiums could shrink as developers try to keep absolute prices of new homes under control.
Moreover, some single young adults live with parents, as renting one’s own place is costly.
Sharing a compact home among several people can make working from home unpleasant and unproductive.
With smaller homes, people may feel a greater urge to venture outside. Also, meeting family and friends often takes place outside of homes.
Second, connectivity in Singapore is good and will improve as the MRT network expands. By 2030, eight in 10 households will live within a 10-minute walk of a train station, making getting around Singapore much easier.
Aided by good transport connectivity, knowledge workers may find that the gains from heading to physical offices to bond with colleagues and co-create ideas easily outweigh the inconvenience of commuting to and from the office.
Luring people out of their homes to visit malls for leisure, routine visits or new experiences is greatly helped by the easy access to affordable, reliable and convenient public transport as well as covered walkways.
Third, habits are formed. Given many knowledge workers here go to physical offices regularly, existing workers and new hires in many companies will expect to spend much of their working hours at physical offices.
Meanwhile, many people have resumed pre-Covid routines of visiting the mall regularly. Moreover, numerous enrichment activities, gym classes and seminars are now held as physical events, with no option for online participation.
Additionally, malls here can serve rising numbers of international business and leisure visitors.
Fourth, landlords who offer great experiences to office space users and shoppers will thrive. As many people are able to work or shop online, the experience offered by office buildings and malls must be enticing enough to draw people to leave their homes.
Major Singapore property players can meet rising demand for high-quality spaces. These groups are financially strong. They can fund capital expenditure for periodic upgrades of buildings to make them relevant. Also, building owners can justify investing to meet customer needs, given that customers here have big budgets.
As long as demand for offices and malls continues to be strong, count on leading landlords to constantly refresh their offerings and provide high-quality property management. In short, top-grade commercial spaces here can enjoy a virtuous cycle of good leasing demand driving continuous investment in upgrading, innovation and maintenance, which in turn draws users.
Mind the valuations
However, owners of office buildings and malls here need to be careful of downside risks to property valuation.
The capitalisation rates used to value properties here are low, and may need to rise to reflect higher interest rates. Using a higher capitalisation rate to value a building can lead to a lower valuation.
Should the capitalisation rate for a Grade A office building in the city be 4.5 per cent instead of 3.5 per cent?
A building with S$40 million in assumed net property income, which is valued at a capitalisation rate of 3.5 per cent, is worth S$1.14 billion. If assumed income is 10 per cent higher at S$44 million and the capitalisation rate is 4.5 per cent, the building’s value is S$0.98 billion – a drop of over 14 per cent.
Much liquidity is eyeing non-residential properties in safe-haven Singapore. Some cash-rich buyers may be unaffected by higher borrowing costs. Also, transaction costs and property taxes are often much lower for non-residential properties versus homes.
Moreover, if asset owners are not in duress, expect asset sales to take place only when attractive offers are received.
Strong and sustainable leasing demand for commercial spaces here, coupled with investment demand from investors buying office spaces and malls for potential capital gains, will likely support valuations of premier office buildings and malls in Singapore.
Ultimately, owners as well as funders of quality office buildings and malls here can draw much comfort from knowing that these assets remain relevant post-pandemic.
https://www.businesstimes.com.sg/opinion-features/post-pandemic-connectivity-and-compact-homes-ensure-quality-offices-and-malls
Jul 10, 2023
OFFICE buildings in many cities are struggling. As remote working gets entrenched, demand for office space has shrunk.
Singapore-listed Manulife US Reit : BTOU +0.6%, which owns office buildings in the United States, recorded a drop in portfolio valuation of about 10.9 per cent at end-2022 versus end-2021. The valuation of the trust’s Figueroa in Los Angeles, which is affected by high vacancy, fell by 33.1 per cent.
There are fears that rising vacancy rates in office buildings in the US, coupled with high interest rates, could lead to some office landlords collapsing, thereby potentially sparking a financial crisis.
Meanwhile, some malls in the US and elsewhere have shut down, partly due to consumers shopping online because of greater convenience and possibly lower prices.
However, major office and mall landlords here are doing fine. Generally, the valuation of CapitaLand Integrated Commercial Trust’s : C38U +2.08% (CICT) Singapore office, retail properties and integrated developments rose between end-2021 and end-2022.
https://i.imgur.com/9dXg3U1.png
For the first quarter, average incoming rents for CICT’s suburban malls and downtown malls rose 5.3 per cent and 7.2 per cent, respectively, versus average outgoing rents. Tenant sales per square foot for CICT’s Singapore retail portfolio rose 10.2 per cent year on year in Q1, and is higher than pre-pandemic levels in 2019.
As at end-March, the committed occupancy of CICT’s Singapore office assets was nearly 97 per cent. For Q1, the trust posted positive rent reversion of 4.2 per cent on its Singapore office portfolio.
Certainly, the growing ease of remote working and online shopping have upped the ante on office and retail landlords here to avoid complacency and delight customers.
Nonetheless, some factors that are specific to Singapore help drive long-term demand for office and retail space here.
Demand drivers
First, many people live in compact homes. A couple with two kids may live in a three-bedroom condominium unit of under 1,000 square feet that costs S$1.5 million to S$2 million, or a Housing and Development Board flat of roughly similar size. And the average size of three-bedroom condominiums could shrink as developers try to keep absolute prices of new homes under control.
Moreover, some single young adults live with parents, as renting one’s own place is costly.
Sharing a compact home among several people can make working from home unpleasant and unproductive.
With smaller homes, people may feel a greater urge to venture outside. Also, meeting family and friends often takes place outside of homes.
Second, connectivity in Singapore is good and will improve as the MRT network expands. By 2030, eight in 10 households will live within a 10-minute walk of a train station, making getting around Singapore much easier.
Aided by good transport connectivity, knowledge workers may find that the gains from heading to physical offices to bond with colleagues and co-create ideas easily outweigh the inconvenience of commuting to and from the office.
Luring people out of their homes to visit malls for leisure, routine visits or new experiences is greatly helped by the easy access to affordable, reliable and convenient public transport as well as covered walkways.
Third, habits are formed. Given many knowledge workers here go to physical offices regularly, existing workers and new hires in many companies will expect to spend much of their working hours at physical offices.
Meanwhile, many people have resumed pre-Covid routines of visiting the mall regularly. Moreover, numerous enrichment activities, gym classes and seminars are now held as physical events, with no option for online participation.
Additionally, malls here can serve rising numbers of international business and leisure visitors.
Fourth, landlords who offer great experiences to office space users and shoppers will thrive. As many people are able to work or shop online, the experience offered by office buildings and malls must be enticing enough to draw people to leave their homes.
Major Singapore property players can meet rising demand for high-quality spaces. These groups are financially strong. They can fund capital expenditure for periodic upgrades of buildings to make them relevant. Also, building owners can justify investing to meet customer needs, given that customers here have big budgets.
As long as demand for offices and malls continues to be strong, count on leading landlords to constantly refresh their offerings and provide high-quality property management. In short, top-grade commercial spaces here can enjoy a virtuous cycle of good leasing demand driving continuous investment in upgrading, innovation and maintenance, which in turn draws users.
Mind the valuations
However, owners of office buildings and malls here need to be careful of downside risks to property valuation.
The capitalisation rates used to value properties here are low, and may need to rise to reflect higher interest rates. Using a higher capitalisation rate to value a building can lead to a lower valuation.
Should the capitalisation rate for a Grade A office building in the city be 4.5 per cent instead of 3.5 per cent?
A building with S$40 million in assumed net property income, which is valued at a capitalisation rate of 3.5 per cent, is worth S$1.14 billion. If assumed income is 10 per cent higher at S$44 million and the capitalisation rate is 4.5 per cent, the building’s value is S$0.98 billion – a drop of over 14 per cent.
Much liquidity is eyeing non-residential properties in safe-haven Singapore. Some cash-rich buyers may be unaffected by higher borrowing costs. Also, transaction costs and property taxes are often much lower for non-residential properties versus homes.
Moreover, if asset owners are not in duress, expect asset sales to take place only when attractive offers are received.
Strong and sustainable leasing demand for commercial spaces here, coupled with investment demand from investors buying office spaces and malls for potential capital gains, will likely support valuations of premier office buildings and malls in Singapore.
Ultimately, owners as well as funders of quality office buildings and malls here can draw much comfort from knowing that these assets remain relevant post-pandemic.
https://www.businesstimes.com.sg/opinion-features/post-pandemic-connectivity-and-compact-homes-ensure-quality-offices-and-malls