Published May 7, 2009

Deals start cooking in slow office market

Three buildings in CBD may change hands as buyers shop again


(SINGAPORE) After a nine-month lull, investment sales activity for office buildings could pick up soon.

BT understands a deal is on the cards for Parakou Building at the corner of Robinson Road and McCallum Street. Due diligence by a potential buyer is also said to be going on for the 13-storey Anson House, while VTB Building (formerly known as Moscow Narodny Bank Building) at Robinson Road has also been generating interest.

The 16-storey freehold Parakou Building, which is about three years old, is expected to change hands at about $82 million or $1,300 per square foot (psf) of existing net lettable area, while a price of about $85 million or $1,100 psf-plus is being bandied about for Anson House. Prices of both properties are about 35 per cent lower than what the owners paid for them in 2007 during the property upcycle.

VTB Building, a 16-storey freehold office block that is more than 30 years old, is said to have drawn offers of around $60 million, which works out to around $900 psf.

'There's a sweet spot for office blocks priced at $1,100 to $1,300 psf or with a lump sum investment of between $70 million and $100 million,' says Knight Frank executive director (investment sales) Foo Suan Peng.

While prices for Parakou Building and Anson House are about 35 per cent below what their owners paid, bigger price discounts are expected for larger office towers costing several hundred million dollars or more because there is less equity around and because of tight bank financing, say property consultants.

Potential buyers keen on Singapore office blocks are said to be assuming at most 50 per cent bank financing for proposed acquisitions these days. Such investors are not institutional players like big-name property funds that dominated office investment sales deals a few years ago, but rather the likes of family concerns with 'old money', investors involved in businesses that are doing well such as renewable energy, as well as a few private equity funds, according to Mr Foo.

And these parties are largely from Singapore and the region (mainly Hong Kong and Indonesia), he added. 'Some of them may have wanted an office building as their flagship business premises or as investment but were priced out in the past two years. These are long-term investors, not short-term traders or speculators,' Mr Foo says.

Credo Real Estate managing director Karamjit Singh says 'there won't be too many office transactions likely to take place in the next six months because sellers that are in a position to hold, will hold'.

'Many owners are sitting on high costs; current values of their buildings will be below cost. If banks aren't chasing them and they are not in a distressed position, these owners are unwilling to take a haircut and are likely to wait it out rather than divest now,' Mr Singh added.

However, the hit on the foreign owners of these buildings from selling properties today below their purchase price may be mitigated by foreign currency movements. For instance, for Parakou Building's owner, UK fund manager New Star Asset Management Group (which was recently acquired by Henderson Group), its expected 35 per cent loss (in Singapore dollar terms) should be significantly offset by a 27 per cent appreciation in the Singapore dollar relative to the pound over its holding period for this investment, a property market watcher observed.

Similarly, the fund managed by Australia's Macquarie Bank that bought Anson House in 2007 for $129.5 million should find its loss from selling the asset for about $85 million being cushioned by the depreciation of the Australian dollar against the Singapore dollar.

Anson House is on a site with a remaining lease of about 87 years.