Published September 24, 2012

Big-ticket property deals reach $8.5b in Q3

Bid-ask gap will be a challenge but QE3 will fuel demand for assets, say analysts

By Kalpana Rashiwala

[SINGAPORE] Investment sales of property, buoyed by deals in the hotels/hospitality segment, have put in their best showing in five quarters, according to Savills Singapore. But the outlook for the rest of this year and the year ahead will be tempered by global economic concerns.

The sales, which cover big-ticket deals, reached $8.5 billion so far this quarter - up 13 per cent from the second quarter's $7.5 billion.

They are also up 77 per cent from the third quarter of last year.

This quarter's numbers were boosted by hotel/hospitality deals - namely, Far East Organization's divestment of seven hotels and four serviced residences, worth a total of $2.1 billion, to its newly listed Far East Hospitality Trust. That more than offset declines in the residential, commercial and industrial segments this quarter, compared with Q2.

Savills' figures also include two 99-year leasehold private residential sites at Dairy Farm Road and Prince Charles Crescent that fetched a total of $761 million at state tenders last week but which have yet to be awarded.

Savills defines investment sales as deals of at least $10 million, though it does include deals below that threshold for Government Land Sales (GLS) sites, residential collective sales and acquisitions by real estate investment trusts.

In the year to date, almost $21 billion of investment sales deals have been done.

Savills' executive director of investment sales, Steven Ming, sees full-year 2012 numbers reaching $27-28 billion - just shy of the $30 billion done last year.

Next year, he projects a further dip in investment sales to around $25-27 billion. "The economies of the West are still in a moribund state and China's slowdown may gain momentum . . . In addition, the notion that assets are already fully priced with limited capital upside will prevent significant flow of opportunistic capital into the market, posing a challenge for the investment sales market," Mr Ming said.

Nearly $6.3 billion or three quarters of the $8.5 billion of investment sales in Q3 were from the private sector. "However, some deals in the private sector have been tempered by the ongoing eurozone crisis, slowing Chinese economy and still-existing bid-ask gap between buyers and sellers," noted Mr Ming.

For instance, investment sales of commercial and industrial properties in Q3 have fallen 38 per cent and 15 per cent, respectively, from the previous quarter.

Savills also observed that the majority of buyers were still local players, as the volatility in the global economic environment continues to deter investments in property, especially from foreign companies and funds.

Investment sales in the residential sector totalled $3.52 billion in Q3, down 13 per cent from $4.04 billion in Q2, due to a decline in the public sector's contribution.

But the value of residential collective sales doubled from $500 million, involving seven deals, in Q2, to $1.02 billion, involving nine deals, in Q3. Except for Thomson View Condominium and Green Lodge - which transacted at $590 million and $191.9 million, respectively - the other seven deals in Q3 were below $100 million each.

Hospitality sector assets totalling nearly $2.7 billion have changed hands this quarter, up dramatically from $150 million in Q2, propelled by the flotation of Far East Hospitality Trust.

In the commercial property segment, big-ticket sales totalled about $1.5 billion in Q3. The largest transaction was Pramerica Asia's sale of a 50 per cent stake in nex mall in Serangoon for $825 million.

Ashish Manchharam, regional director of investments at Jones Lang LaSalle, which brokered that deal, reckons the main challenge for investment sales going ahead is the bid-ask gap. "Sellers have holding power and are not motivated to sell below their pricing expectation. On the demand side, there's still a lot of liquidity, and funding is available but property yields are tight. Given the macro-economic uncertainty, investors are not willing to take that extra step."

Colliers International executive director Tang Wei Leng suggests that beyond bridging the price gap, agents may have to seek ways to align the interests of buyers and sellers in order to motivate them to close the deal. "For example, we could help them to forge future business relationships, upstream or downstream," she said.

On a brighter note, Savills' Mr Ming said that, with the third round of quantitative easing by the US Federal Reserve (QE3), a fresh flood of liquidity is expected to spill into the real estate market. "We expect more capital to be chasing income-yielding assets, particularly office and hotel assets."

Savills Singapore research head Alan Cheong adds: "In Singapore, the three-month interbank rate could fall by an average of 27 basis points in the course of next year, which will lower borrowing costs. This will leave room for a further compression in property yields, thereby lifting capital values."