Singapore’s office market is expensive compared with Australia and Japan because of a space glut and slowing rental growth, according to Union Investment, Germany’s largest fund manager.
Office rents peaked in the first quarter as the city-state’s economic growth shows signs of tapering, according to Cushman & Wakefield Inc. Grade A office rents in the central business district could slide 14 percent over the next two years to S$9.12 per square foot per month from S$10.60 per square foot, Cushman estimates.
“It’s positive because of the quality of assets, maturity of assets, transparency of markets for practical reasons, but for economic returns it’s less attractive at this point in time,” Eric Cheah, Asia-Pacific head of investment management at Union Investment, said in an interview in the city-state.
Union, which has one office asset in Singapore, is increasing its bets on central district offices in Australia and Japan instead, Cheah said.
Rents in Singapore’s central business district jumped 14 percent in 2014, posting the biggest increase in the region, according to Jones Lang LaSalle Inc.
Overseas sales unexpectedly fell for the first time in three months in May, signaling a weakening growth outlook for the export-dependent nation. Consumer prices prices declined for a sixth straight month in April and employment contracted last quarter for the first time since 2009.
Some landlords are considering selling their properties. BlackRock Inc., the world’s largest asset manager, said it has received expressions of interest for Singapore’s Asia Square Tower 1 and could get more than S$4 billion ($3 billion) for the building whose tenants include Citigroup Inc. The fund hopes to close the deal by the end of the year, he said.
BlackRock may also look to sell Asia Square Tower 2, Greg Lapham, a real estate managing director at the firm, said in an interview at the Real Estate Investment World conference in Singapore on Wednesday.
Keppel Land Ltd.’s investment company is also planning to sell its 50 percent stake in Capital Square, a 16-story building in Singapore’s financial district.
The divestments will come as supply increases. Over the next four years, 8 million square feet of office space and more than 3 three million square feet of business park space will become available, according to Cushman.
The Singapore property index tracking 49 real estate companies dropped 0.5 percent as of 9:19 a.m. local time, set for the lowest in three months.
“The Singapore office user has never been so spoiled for choice; the question that investors are grappling with is what will trigger growth in the medium term to drive take-up of this huge supply,” said Singapore-based Priyaranjan Kumar, regional executive director of capital markets at Cushman.
Tokyo, Sydney, London, New York, San Francisco and Boston currently offer either better spreads or clearer evidence of near-term growth, Kumar said.
The Singapore government’s control of land supply will keep rents from surging, Cheah said.
“There is an element of policy risk in Singapore in terms of its pro-business support to keep rentals in check so they don’t get to too high levels,” Cheah said. “There is the opportunity for them to just release more sites so they can keep a certain ceiling on rentals.”
Union Investment, which oversees 240 billion euros ($270 billion) globally with about 29 billion euros in real estate assets, plans to double its property investments in the Asia-Pacific region to 2 billion euros over the next three to five years, Cheah said.
The fund has 10 properties in Tokyo and may look for office assets in Osaka, he said. It will also scout for opportunities in Australia where it currently has one asset in Brisbane in Queensland state, he said.
“We will always keep an eye on Singapore, but from a returns perspective there is not that much opportunity around,” Cheah said.