Real Estate

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Singapore's office landlords are among the world's most luckless right now, and they have builders to blame. The market already has an empty feel to it, and as developers add more space in a slowing economy, property owners' misery could keep compounding.

Over the past year, the city's three big office real estate investment trusts -- CapitaLand Commercial, Suntec and Keppel REIT -- have lost investors between 24 and 30 percent. Exclude them, and the average return on REITs that have at least $1 billion in market value and garner 40 percent or more of their revenue from owning office properties has been minus 10 percent globally, according to data compiled by Bloomberg:

Singapore Landlords Are Suffering
One-year total returns for Singapore's top three office REITs are way below world average
*As of January 21, 2016; REITs with at least 40 percent revenue from owning offices and $1 billion or more in market value

Keppel REIT and CapitaLand Commercial, which reported earnings this week, are offering dividend yields of between 6.5 and 7.6 percent, a hefty premium on the 2.4 percent yield on 10-year Singapore government bonds. Yet investors don't want to catch a falling knife.

The residential property market is also suffering, with prices down 8.4 percent in a little more than two years. That decline has been largely a result of government policies aimed at curbing speculation and protecting Singaporean households from sinking deeper into debt. There's hope that authorities may do away with some of the restrictions to prevent a rout in home values.

The office market, however, is victim of a more fundamental miscalculation. Singapore developers got carried away by misplaced optimism in China's ability to keep growing its economy by 9 percent every year. All that talk about the dawn of the Asian century made builders woolly-headed. They didn't fully understand that REITs' seemingly endless appetite for yet another glass-and-chrome tower was less a result of actual demand and more a desperate search for yield by investors.

Empty Chairs at Empty Tables
Some 3.35 million square feet of office space is coming onto the market this year
Source: Jones Lang LaSalle

If developers and REIT managers had paused for a minute and wondered just who, outside of a shrinking global banking industry, would really need to put lots of warm bodies in the central business district, the frenzied construction would have stopped long ago. But as things stand, the city's tallest office tower is going to open for business this year. That's 38 stories of prime office space from just one project. But where are the tenants? Banking is still in the doldrums, with Barclays expected to cut jobs most deeply in Asia. Already, the top 20 major foreign banks in Singapore's CBD are sitting on more than 550,000 square feet of excess space, according to Jones Lang LaSalle. Some 7.4 million square feet of new supply is in the pipeline, a big chunk of which will hit the market in 2016. The property researcher expects prime office rents, which fell 15 percent in 2015, to slump by another 10 to 20 percent this year.

Meanwhile, the search for yield in Singapore's office market is well and truly over. Borrowing costs are rising, and the central bank is looking askance at highly leveraged purchases. Now that Singapore REITs will also be required to limit their borrowings to 45 percent of assets, it doesn't leave them much room to buy things on the cheap from developers.

Debt Diet
Singapore REITs are leveraged, but so are others in the region
Source: Bloomberg
*Real estate investment trusts with $1 billion or more in market value

With about 90 percent of the population in Singapore owning their homes, there's a strong incentive for the government to step in and prevent a collapse. But when it comes to offices, the more empty spaces there are, the lower the cost of doing business. That's a net gain for the city-state's competitiveness, and would presumably give it a leg-up in its perennial rivalry with Hong Kong. The cost, though, is considerable pain for office landlords. And an empty feeling that won't go away soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net