News Update: BT 22 Aug 2020: Opportunities emerging for investment property deals; discounts up to 20%

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An interesting article that depicts the projection and trend of different asset classes of the Property Sector.

The author advised investors to be ready to invest in the 2H 2020, especially for commercial office space.

Basis of Author’s comparison is based on the different price movements during the 1997 Asia Financial Crisis and 2008 Great Financial Crisis.  The amount of liquidity of funds in the market. Industrial and residential prices may be less compelling as their prices have not corrected by much. They have only been down by -1.6 per cent and -1 per cent respectively in H1 2020.

Importantly, the nature of this Pandemic-Economic Crisis has forced a certain adaptation change of use in the traditional office space and Industrial space.

Would you agree or disagree with the author?

Summary of Article

SOME good may come from the Covid-19 pandemic – real estate is being offered to investors at lower prices as Singapore plunges into the worst recession on record. Opportunities could emerge with 10-20 per cent discounts from the pre-Covid level a couple of quarters down the road.

Investment sales – defined as S$10 million and above – were muted in Q1 2020 but subsequently there have been some big deals such as the sale of AXA Tower, Chevron House and Robinson Point.

The largest transaction in Q2 was Alibaba Group buying a half stake in AXA Tower in a deal which valued the property at S$1.68 billion.

But investors should not hold out for fire sales, unlike previous crisis which saw prices plunge as much as 45 per cent for industrial and office assets during the 1997 Asian financial crisis. Then, rents also similarly took massive hits.

But in the 2008 global financial crisis, prices fell less – to a maximum of 22 per cent for industrial and office, while office rents were down 25 per cent.

“The situation is quite different now – the market is full of liquidity; access to credit is a lot easier – therefore there are a lot of buyers waiting on the sidelines . . . so the discount tends to be lower,” Christine Li

“So the next few quarters will be a good time for investors to start looking around,” she said.

Hospitality and retail sectors are more negatively impacted by Covid-19. As the recovery in demand is expected to take a while, sellers who wish to eliminate their exposure to these sectors are likely to offer an attractive re-pricing of 10-20 per cent and 10-15 per cent below pre-pandemic values for hotel and retail assets, respectively, said Ms Li.

The prognosis for the office sector, the most sought-after asset class prior to the pandemic, is mixed. Balancing the impact of social distancing on density with less office-based headcount demand will likely not affect current footprint sizes; and offices will continue to thrive but in new ways.

Another potential source of purchasing opportunities is from funds with a fixed fund life, which is typically five years, said Ms Li.

“As these funds have to return capital to their investors at the end of the five-year holding period, they are not able to hold these assets through the downturn and wait for a more favourable exit position. Investors can examine properties purchased by funds during 2015-2016 to uncover potential acquisition targets,” she added.

Ms Li’s analysis shows that the five-year returns during non-crisis periods range between 7.1 per cent and 20 per cent for all major asset classes, but the five-year returns during crisis periods range between 20.3 per cent and 30.4 per cent. “This is significantly higher although it takes a brave heart to go in during a crisis,” she noted.

In 2009, Keppel Reit acquired levels 20-25 of the Prudential Tower for S$106.3 million or S$1,579 per square foot (psf).

In 2014, it divested its entire 92.8 per cent stake in Prudential Tower for S$512 million or S$2,219 psf. On a psf basis, this represented a gain of 41 per cent over five years for the six floors purchased during the recession. Had the transaction not been a bulk sale, the capital gain would probably have been significantly higher, she said.

Yi Kai Group and Fission Group acquired 137 Cecil Street from an Aviva fund for S$65 million in 2009. A year later, the asset was flipped to Cheong Sim Lam for an undisclosed price.

Subsequently, Cheong Sim Lam divested it for a hefty S$210 million in 2015. Had the original purchasers held on to the property, they would have netted a robust 223 per cent capital gain over six years.

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