Updated from : The Business Times, 22 August 2020
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, said Christine Li, Cushman & Wakefield head of business development services, Singapore & South-east Asia.
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.
Olayan Group bought the retail and banking units of 30 Raffles Place, formerly known as Chevron House, for S$315 million. Robinson Point is set to be sold for S$500 million said Tuan Sing Holdings earlier this month.
“An analysis based on URA and JTC data in the last 20 years found that despite the challenging environments during crisis periods, the capital appreciations arising from investments during these periods tend to outperform capital appreciations during normal times,” Ms Li said. This holds true for any asset class – office, residential, retail and industrial.
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.
That was due to quantitative easing (QE) measures which saw trillions of US dollars unleashed into the global financial system by central banks’ securities purchases, Ms Li said.
By 2010, the US Federal Reserve said M1 – which is money for spending – had reached US$1.7 trillion. QE has continued, reaching US$4 trillion at the beginning of 2020. This month, it has hit US$5.5 trillion.
Dry powder at closed-end real estate funds amounted to US$338 billion as at April 2020, compared with US$176 billion in 2009, said Ms Li.
“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,” she added.
Buyers are aware of the competition, while sellers are more receptive to a reasonable price level compared to pre-Covid days, she said.
In H1 2020, office and retail prices were already down by 8.1 per cent and 7.1 per cent respectively.
“So the next few quarters will be a good time for investors to start looking around,” she said.
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.
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.
Ms Li expects consolidation in the co-working sector which has been impacted significantly. In addition, sub-lease spaces are expected to enter the market as retrenchments free up spaces. “Therefore, we could see a re-pricing of office assets at 10 per cent below pre-pandemic values,” she concluded.
Logistics and data centre assets on the other hand, are more resilient due to the surge in e-commerce and remote working. These assets could be suitable for investors who are more risk-averse and desire stability.
Typical sources of opportunities for buyers are from companies with cash flow issues stemming from the recession, necessitating a sale of their assets to free up liquidity, she said.
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.
The analysis also shows that it does not matter when the crisis period is entered, because the probability of securing a higher return during crisis period is between 56 per cent and 76 per cent.
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.