Institutional investors in recent quarters have been increasingly adopting a shorter term (opportunistic) strategy towards Singapore CBD office investments as opposed to the traditional longer term (core) income play. Based on YTD 2014 figures, opportunistic investment comprised 68% of total CBD office enbloc transaction value, an increase from the 27% and 25% registered in FY2013 and FY2012 respectively.

Recent examples of opportunistic investments include Prudential Towers and Equity Plaza, both of which changed hands with the consideration to eventually strata subdivide to individual investors and end-users. So why the switch in gear?

The end of cheap money and attractive yield spreads

Quantitative easing by the US Fed ended in October 2014. The recent improvements in the US employment and inflation rate suggest that it is only a matter of time before the Fed revises its target interest rate upwards.

Real estate borrowing costs are therefore expected to rise correspondingly. We understand that core investors are more cautious towards investment in commercial assets due to the 1) compressed yield environment which has tightened yield spreads (Figure 1) and 2) a potential supply overhang when 3.7 million sq ft of office space completes in 2016. This is reflected in the reduction in core investments which has been on a decline since 2013.

Figure 1: CBD Overall Office Investment Yield vs Borrowing Cost

Note: many commercial real estate loans in Singapore are pegged to SIBOR, usually with a premium of 150-200 bps
Source: JLL Research, Monetary Authority of Singapore

Strata subdivision of offices a viable investment alternative

The change in institutional investment strategy has also been driven by strong demand for strata offices, which has been on a rising trend since 2009 (Figure 2). In a recent launch of strata project Havelock II by Guthrie, some 40% of the 50 office units were snapped up quickly, fetching an average unit price of SGD 2,228 per sq ft.

Dominated primarily by seasoned investors and end-users, strata ownership acts as a shield against rental increases in a volatile office market.

Figure 2: Overall Strata Transaction Value

*Data as of August 2014
Source: JLL Research , URA

What’s next?

There remains a strong case in the longer term for institutional investors to continue on this subdivision trend, particularly within the CBD where 1) quality strata stock is rare (currently comprises just 4% of the market) and 2) there is strong demand from owner occupiers looking to hedge against the volatile rental market. Additionally, rising rentals which are expected to be sustained through till 2Q15 should provide additional incentive for opportunistic investors looking to enter the Singapore office market.

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