Strata Office Space An Expanding Asset Class. January 2015

Transcription

1 Strata Office Space An Expanding Asset Class January 2015

2 CBD Strata Office Space Takes Centre Stage Demand for quality pipeline strata office space supply will remain resilient on the back of limited stock and the rising rent market. The CBD office space market is witnessing a significant trend in strata office space investment, in new strata office space projects being launched and existing office buildings that have been strata 2 JLL sub-divided by their owners to capitalise on the demand for such assets. This trend is also due to the limited stock of strata office space available for sale, while a rising rent market has also generated greater interest from end-users and investors alike.

3 Strata Office Space Supply Strata Office Space Demand CBD strata office space stock could potentially grow by 14.6% to some 6.8 million sq ft between now and 2018, led by the creation of new strata stock from three primary sources. First, there is the redevelopment of older office buildings into brand new strata office space. Examples include the building of Oxley Towers on the site of the former Corporate Office and Robinson Square, where the Corporate Building previously stood. Second, new strata office space has also been developed in mixed-use projects arising from government land sales, for example SBF Centre, developed by the successful bidder, Far East Organisation, which will be ready for occupation by Finally, strata office space supply has also been created by the sub-division of existing buildings that were previously owned by a single or major entity. Recent institutional purchases such as Equity Plaza and Prudential Tower are believed to have been made with the intention for strata sub-division into smaller units that are more affordable to individual investors and end users. Collectively, these acquisitions contributed about 60% of the value of prominent CBD en bloc office space transactions completed so far this year (Table 1). This trend of strata sub-division is probably due to a lack of quality strata stock within the CBD, which currently comprises just 4% of the overall CBD sub-market. Table 1: Prominent CBD En Bloc Office Space Investments in 2014* Building Name Transacted Price (SGD million) Unit Price (SGD per sq ft) Prudential Tower 512 2,316 Anson House 172 2,252 Equity Plaza 550 2,181 Cecil House 110 2,175 Straits Trading Building 450 2,800 Source: JLL Research *Excludes related party transactions, i.e. REIT acquisitions from sponsor Demand for CBD strata office space has been growing over the past five years (Figure 1), with transaction values peaking at SGD 1,329 million (55.0% y-o-y growth) in 2013 before tapering to SGD 906 million as at November 2014, due to the effects of the Total Debt Servicing Ratio (TDSR) on investors, following its introduction in June The growth in investment in strata office space is due to the following: 1. Low interest rate environment: High liquidity resulting in low interest rates following the three rounds of quantitative easing by the US has provided investors access to lower borrowing costs when investing in strata office space. 2. Flow of capital from other asset classes, most notably residential: Due to increased regulation in the residential property market, investors have explored investment in other real estate assets, including strata office space. 3. Availability and variety of quality strata office space: Historically the supply of quality strata office space within the CBD has been limited, as the developers intention then was to hold these projects as prized trophies for the company. Grade A strata office space currently comprises just 1.3 million (22.7%) of the total CBD strata stock of 5.9 million sq ft. The launch of several new quality strata office space developments, such as the SBF Centre along Robinson Road and Eon Shenton in Shenton Way, and the subdivision of better grade strata office space in reputable buildings, such Prudential Tower along Cecil Street and Equity Plaza, which is adjacent to the Raffles Place mass rapid transit station, have and eventually will increase the quality and diversity of strata stock in the CBD for investors. Figure 1: CBD Strata Office Space Transaction Values Millions (SGD) 1,400 1,200 1, New Sale Resale Sub Sale *Data as of November 2014 Source: JLL Research, URA Realis Strata Office Space An Expanding Asset Class 3

4 Types of Strata Office Space Buyer Owner-Occupier/Long-Term Investors The ability to strata sub-divide en bloc office space within the CBD has enabled developers and owners to tap on a wider pool of investors, as the investment quantum for strata office space is lower and, therefore, more affordable compared to en bloc office space. The high capital requirement in buying en bloc office space is a significant barrier for many smaller independent investors. Typically, the investment outlay is so high that only institutional buyers and ultra-high-net-worth individuals have been able to access the office space investment market. In the past five years, the average transaction value for strata office space assets was SGD 4.3 million 1, which many investors could afford compared to en bloc office space transactions, which averaged SGD 283 million 2 for the same period. Based on our observation, investment trends in the strata office space market are driven essentially by two groups, owner-occupiers/longterm investors and short-term investors. Figure 2: Breakdown of Short-Term* vs. Long-Term Strata** Office Space Investors by Transaction Value Millions (SGD) 1,400 1,200 1, ^ Short Term Investors Long Term Investors/Owner Occupiers ^Data as of November 2014 Source: JLL Research *Short-term investors are recognised upon purchase of an office space unit and defined as buyers who have undertaken sub-sales or have sold their property within three years or less. Data for will not reflect the full contribution of short-term investors due to the limitations of recognising shortterm investors for these years. **Long-term investors/owner-occupiers are defined as buyers who have bought and held on to their property for more than three years. Owner-occupiers and long-term investors are those who hold on to their investment for more than three years. This group has traditionally dominated transactions in the CBD strata office space market, accounting for 91.1% of transaction value between 2007 and From their perspective, strata ownership acts as an excellent shield against rent increases. Shipping and oil and gas companies are typically keen on purchasing strata office space for owner-occupation due, possibly, to the longer investment horizon expected for their underlying businesses. Furthermore, CBD strata office space assets seem to provide strong capital appreciation. Over the past five years (2009 to 2014), strata office space capital values on a per square foot basis have appreciated by 102.6%, while net yields have compressed from 4.0% to 2.0% over the same period. En bloc transactions, on the other hand, registered slower growth of 66.6% over the same period, while net yields have stayed higher between the 3.5% and 4.5% range. This is attributable to the yield driven nature of en bloc acquisitions, which are typically traded to generate recurring income. Caveat matches, which take into account like-for-like unit transactions, revealed an average 10.5% compounded annual growth rate (CAGR) on transacted prices from 2006 until present. 1 Data based on REALIS CBD Strata Office Transactions from 2009 to November Data based on JLL CBD En Bloc Office Transactions from 2009 to November JLL

5 Short-Term Investor Strata Ownership Challenges Correspondingly, short-term investors are defined as those who sold their assets within three years of the initial purchase. While this shortterm investor activity comprised just 8.9% 3 of total strata office space transaction value in the five-year period from 2007 to 2011, the annual sales value increased significantly (589.3%) to a peak of SGD million in 2011 from SGD 14.8 million in 2007 (Figure 3). This trend is possibly encouraged by the low interest rate environment, tighter regulation in the residential market and the availability of affordable strata office space for investment. Capital appreciation based on caveat matches also revealed much stronger growth for short-term investors compared to longer-term investors, which averaged a 23.7% CAGR from 2006 until present. Figure 3: CBD Strata Office Space Investment by Short-Term Investors* Millions (SGD) While historical performance indicators generally paint a positive picture for strata office space assets, potential purchasers should also take into consideration the challenges inherent in such an ownership context. Fragmented decision-making process Collective decision-making from individual owners as part of the management corporation strata title is required for the approval of operating (ongoing maintenance) and capital expenditures (refurbishment or redevelopment works) for strata-titled assets. As such, initiatives to improve the overall management of these properties could drag on for protracted periods, pending approval by the various parties involved. Leasing market limited to smaller occupiers The target occupier market for strata investors will also differ from landlord owned assets due to differences in unit format and size. For instance, bigger tenants such as the financial institutions and MNCs would opt to locate within landlord owned assets that are able to offer larger floor plates to accommodate their business needs. Strata units, on the other hand, are typically much smaller and would better suit the needs of smaller occupiers such as the small and medium enterprises in the business services sector ^ Short Term Investors ^Data as of November 2014 Source: JLL Research *Short-term investors are recognised upon purchase of an office space unit and defined as buyers who have undertaken sub-sales or have sold their property within three years or less. Data for will not reflect the full contribution of short-term investors due to the limitations of recognising shortterm investors for these years. Strata Office Space An Expanding Asset Class 5

6 Strata Office Space Outlook In the longer term, derived office space demand from the services sector is still expected to remain resilient given the sound economic fundamentals of 1) the growing contribution of modern services (includes financial & insurance, telecommunication and other business services 4 ) to total services exports and 2) increasing complexity of business functions which will lend further growth to business services. Modern services will continue to underpin services sector growth, thanks in part to its growing contribution (Figure 4 shows an increase from 35% in 2003 to 40% in 2013) to total services exports over the past decade. This will favour key contributors to services GDP including the finance and business services sectors, which have benefitted from 1) the continued financial sector liberalisation in the region, while 2) an increasing specialisation of job functions such as legal, accounting, consultancy and marketing services which has led to an increase in firms outsourcing these support functions. Increased complexity of job functions is also expected to aid growth in business services. This is best exemplified by the boost in demand by financial institutions for compliance and risk experts post the subprime credit crisis, driven by a need to comply with newly imposed global regulations covering areas such as anti-money laundering, privacy, Solvency II, Basel III, FATCA (Foreign Account Tax Compliance Act) and corporate governance. Likewise, ICT (Information Communication Technology) services have also benefitted from advances in the information technology arena with firms requiring specialised support to protect and manage sensitive company data. Figure 4: Share of Modern Services* Exports in Total Services Exports in 2003 and 2013 Per Cent Modern Services* Exports Source: Singapore Statistics *Modern services includes finance & insurance, telecommunications, computer & information and other business services Given the positive long-term factors underpinning office demand, the development of more quality strata office space in new commercial projects and strata sub-division of existing office buildings will provide more investment opportunities for end-users and investors. Anthony Barr, JLL s Regional Director of Investments, opines that Demand for strata offices, particularly those of good quality and locale, will likely remain resilient and continue to be driven by owner-occupiers looking to hedge against a rising rent market and seasoned investors holding a longer-term view to such assets despite the borrowing constraints arising from the TDSR. This is very much attributable to Singapore s established financial hub status and the rarity of such quality office assets. 4 Includes accounting services, advertising and market research services, architectural services, business management services, engineering and technical services, legal services and R&D services. 6 JLL

7 About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialised real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or million square metres, and completed $99.0 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $53.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit JLL has over 50 years of experience in Asia Pacific, with over 27,500 employees operating in 80 offices in 15 countries across the region. The firm was named Best Property Consultancy in seven Asia Pacific countries at the International Property Awards Asia Pacific 2014, and won nine Asia Pacific awards in the Euromoney Real Estate Awards Contributors: Aaron Cheong Analyst, Research aaron.cheong@ap.jll.com Anthony Barr Regional Director, Investments anthony.barr@ap.jll.com Dr Chua Yang Liang Head of Research, South East Asia yangliang.chua@ap.jll.com Strata Office Space An Expanding Asset Class 7

8 JLL Singapore 9 Raffles Place #39-00 Republic Plaza Singapore tel fax Jones Lang LaSalle Property Consultants Pte Ltd CEA Licence No. L E 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.