Published July 7, 2008

Property yield spreads widen but investors wary

Optimistic outlook for Asia-Pac market, says DTZ report


(SINGAPORE) Institutional investors are seeing some property yield spreads over 10-year bond rates widen globally but DTZ Research believes the correction in real estate markets has some way to go.

According to a recent DTZ Research report, Money Into Property, the yield spread over the local 10-year bond rate in Singapore increased by about one percentage point in the first quarter of this year on a year-on-year (yoy) basis to just under 4 per cent, and is higher than that in China and Japan, which both have yield spreads of under 3 per cent.

While the high yield spread implies growth potential and profitability in the real estate investment market, DTZ Research did add, however, that Singapore is not immune from the weakening global financial market outlook, with investors becoming increasingly cautious.

DTZ executive director and regional head for consulting and research Ong Choon Fah said: 'With prospects for capital growth limited, investor focus has returned to occupier fundamentals.'

In Singapore, DTZ says that rentals for prime office space in Raffles Place grew 1.1 per cent quarter-on- quarter (qoq) to $19 per square foot per month in the second quarter of this year.

In the Shenton Way/ Robinson Road/Cecil Street area, average rentals in Q2 increased 2.6 per cent (qoq) to $11.80 psf per month. In the HarbourFront area it's up 5.3 per cent (qoq) to $10 psf per month.

Rentals in Marina Centre and Orchard Road were flat at $15.50 and $13.50 psf per month respectively.

DTZ said that the supply crunch in the Central Business District will ease from 2010 with potential supply of new office space from the second half of this year to 2013 estimated to be 12.1 million sq ft.

Already, the average islandwide occupancy in the second quarter of this year has dipped slightly by 0.2 percentage point (qoq) to 96.9 per cent.

Average occupancy of office buildings in Raffles Place and Marina Centre dropped 0.3 and 1.2 percentage points to 97.4 and 98.6 per cent respectively.

Still, DTZ believes that the outlook for Asia Pacific is relatively optimistic, supported by the occupier market and improving investment access.

'Globally, we expect investment transactions to be around US$500 billion in 2008, down 30 per cent on 2007. This shift reflects weakness over the first half of 2008 and a relatively modest pick-up thereafter, which is likely to be driven principally by the Asia Pacific market,' added Mrs Ong.

Increases in yield spreads were greatest in Europe with the UK seeing the biggest year-on-year rise of almost 2 percentage points in Q1 2008 to just under one per cent.

DTZ notes that the rate of fall in capital values has been slowing in recent months in the UK, so that while investment returns remain in negative territory, some improvement has been evident.

According to DTZ estimates, investment transactions in the UK appeared to stabilise in Q1, with the market's relatively sharp repricing beginning to attract foreign-equity-based investors, notably German funds.

At the same time, DTZ said an increasing number of new opportunity (or 'vulture') funds have been set up to pick up distressed assets in the UK market at bargain prices, while sovereign wealth funds are also waiting in the wings.