AS falling rents and a supply glut haunt Singapore’s office market, IOI Properties Group Bhd sprang a surprise last week — it is paying a record S$2.57 billion (RM7.77 billion) for 1.09ha of land in Central Boulevard.
Last Friday, the group announced that its wholly-owned subsidiary, Wealthy Link Pte Ltd, had successfully bid for the prime tract offered by Singapore’s Urban Redevelopment Authority, beating six other international bidders.
It seems that IOI Properties was very determined to buy the land located at Marina Bay — Singapore’s new central business district — judging by the hefty price it is paying.
Its bidding price was 16.29% higher than that of the second top bidder, Mapletree Trustee Pte Ltd, and is equivalent to S$1,689 psf per plot ratio — the highest bid recorded for a white site in the Government Land Sales Programme. The last record price was S$1,409 psf, set almost 10 years ago for the tract on which Asia Square Tower 1 now stands.
However, the deal has not gone down well with some shareholders, partly because of IOI Properties’ previous venture in the city state. In 2007, the group spent S$1.56 billion to buy land on Sentosa Island for property development. The timing was bad — the global financial crisis struck, followed by the Singapore government’s measures to curb spiralling property prices. It had to delay the project and when it was finally launched, sales were below expectation.
“It is a risky venture as the group is paying a bull-market price amid challenging economic conditions. Moreover, the group’s Singapore property business has not been successful. It still has substantial high-end products not sold,” says a property analyst.
“In four to five years, it may be different. But definitely, the investors do not like it, because we don’t even know when it (office market) will hit bottom.”
The latest land deal added downward pressure to IOI Properties’ share price. Last Wednesday, the stock fell as much as eight sen or 3.29% to RM2.35, the lowest level since Aug 15. It closed at RM2.34 last Friday.
Singapore’s gross domestic product grew 0.6% in the third quarter of this year — the lowest since the 2008/09 global financial crisis.
According to JLL Singapore, rents for offices in the central business district contracted 1.9% quarter on quarter and capital value declined 1.1% in third quarter.
However, Tom Edwards, executive managing director and head of valuation and advisory services and consulting services of CBRE in Asia-Pacific tells The Edge that the valuation is in line with the advisory firm’s confidence in the long-term prospects of the Singapore office market.
He says while Singapore’s office market is undergoing corrections, rental adjustments are seen easing gradually. He expects rents to recover by end-2018, barring any unforeseen circumstances.
Meanwhile, IOI Properties defends the deal, saying that prices in the secondary market are much higher and that it should be seen as a long-term investment.
The challenging economic conditions are not a concern, says IOI Properties chief operating officer Teh Chin Guan. “It is true that Singapore’s office market is soft now, but it’s cyclical. You have to take a long-term view,” he tells The Edge.
To him, the tract deserves a high premium as there has not been any land opened for bidding in the past eight years.
In filings with Bursa Malaysia last Friday, IOI Properties says Qatar Investment Authority’s purchase of the 99-year leasehold Asia Square Tower 1, which is adjacent to the tract it successfully bid for, for S$3.4 billion or S$2,700 psf from BlackRock in June was costlier than its deal.
Besides, recent office building transactions in the vicinity were done at much higher prices. For example, the 999-year leasehold, 28-storey Straits Trading Building in Battery Road was bought by MYP Ltd in June for S$560 million or S$3,520 psf. A month before, CapitaLand Commercial Trust acquired the remaining 60% stake it does not own in the 40-storey CapitaGreen office tower in Market Street for S$393 million or S$2,276 psf.
Two significant strata office deals were also transacted in the second quarter, namely the sale of the entire 13th floor of 6 Raffles Quay for S$28 million (S$2,764 psf) and the sale of the 13th floor of Tong Building in Orchard Road for S$25.5 million (S$3,713 psf), the group says.
“Everyone was excited [about the land tender]. That was why a lot of international bidders participated. The tract is for a mixed-use development ... can build hotels, offices, serviced apartments and retail outlets,” says Teh.
He adds that the group is financially strong and able to fund the purchase via internal funds and bank borrowings. Besides, it is open to having a joint-venture partner as the potential gross development value of the tract is substantial.
As at June 30, 2016, IOI Properties had cash of RM2.1 billion and borrowings of RM4.2 billion. Its net gearing stood at 14%.
On IOI Properties’ earlier venture in Singapore, Teh concedes that it has been affected by the slowing high-end property market and the additional stamp duty imposed by the government. However, he emphasises that the group has overcome the issues through a combination of selling and leasing. “The leasing market is doing fine. Properties that we cannot sell are leased out. Singapore is an international market ... there are a lot of multinational companies and many people like to work there,” he says.
Teh expects to see more growth in Singapore than in Malaysia. He cites the group’s South Beach mixed-use development in Beach Road as an example. About 95% of the office tower has been leased out to multinational corporations such as Facebook, Boeing, Expedia and Legoland, he says.
“For the office market, Singapore usually does better than Malaysia. Our office rental rate remains strong with a double-digit growth rate,” Teh says.
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