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.

For all the damage it's doing to a fragile global economy, Brexit might have some unintended positive consequences. Among them, perhaps, a soft landing for Singapore's wobbly property market.

With hindsight, the seemingly excessive S$3.4 billion ($2.5 billion) that Qatar Investment Authority paid BlackRock this month to buy an office tower amid a glut of commercial space could turn out to be a decent diversification, if not an altogether shrewd investment.

Badly Need Good News
Singapore's office REITs have erased all gains of past five years
Source: Bloomberg
*Market-capitalization weighted index of 17 Singapore REITs focused on owning office and industrial properties.

This might seem like an odd time to make a case for Singapore property. Office prices on the island peaked more than a year ago, after almost doubling over about a decade. Rents in business districts have fallen 10 percent in the past year. Roughly 700,000 square meters of office space was vacant at the end of March, and another 825,000 square meters of capacity is under construction. The worsening oversupply could easily push vacancy rates, currently 9.2 percent, a lot higher. 

Lift, Please
Singapore's stagnant commercial property market would welcome Brexit-linked capital inflows
Source: Singapore Urban Redevelopment Authority, Bloomberg

Yet Brexit does change the calculations on a relative basis.

Large investors like QIA, which has invested $38 billion in property around the world, are bound to pare their expectations for London real estate following Britain's vote to leave the European Union, and that might prompt some of them to seek yield in rival financial centers. 

Hong Kong isn't too appealing, because of concerns about China's economic slowdown and debt overhang. Besides, the exuberant growth in Hong Kong property prices over a decade of China-linked frenzy makes its office market more vulnerable to a slide than that of Singapore.

Tokyo might have been another contender. But a strong yen could undermine the deflation-fighting credentials of Prime Minister Shinzo Abe's administration. The rally in Tokyo property fueled by negative interest rates may not last.

Singapore's commercial property market, on the other hand, could see fresh inflows of capital alongside more obvious beneficiaries in continental Europe such as Frankfurt and Paris. That's more likely, however, to prevent a slump in prices of existing assets, rather than to lead to a rush by developers to build new towers.

Take QIA's purchase of Asia Square Tower 1, which BlackRock was hoping last year would fetch S$4 billion or more. A 15 percent discount from those levels offers some cushion to the new buyer from lower rents. Even then, the eventual purchase price of S$29,000 per square meter appears fully valued, given just how active banking-industry tenants like RBS and ANZ have been in shedding space.

A genuine recovery in Singapore's office market may not start before 2019. By then, new construction will be tapering off, and multinationals, including banks, will have greater clarity on where they ought to be expanding to compensate for cutbacks in London. Singapore can lay claim to some of that investment.

For that to happen, though, Indonesia and India -- the two large economies in the city-state's neighborhood -- ought to be firing on all cylinders, and Singapore has to begin easing its current clampdown on foreign workers, which is becoming a drag on the island's competitiveness.

What the Brexit vote does is to hand the island a chance to work through its property glut without giving landlords a heart attack. The unexpected prop for Singapore's office market makes Qatar's pricey purchase appear clever, if not quite clairvoyant.

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:
Paul Sillitoe at psillitoe@bloomberg.net