Capital value of grade A offices to fall 10% by end-2014

Higher cap rates, weaker rents.

Maybank noted that rental growth assumptions appear to have a greater effect on capital values, hence it expects capital values to moderate slightly on the back of higher cap rates, but lackluster rental growth. Our forecast is for the average Grade A capital value to decline by 10% by end-2014 to SGD2,250 psf.

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Based on CBRE’s records, market yields of Grade A office space have come off from a peak of 6.6% in 3Q08 to the trough of 3.73% in 4Q12 on the back of yield compression.  

With expectations of a higher interest rate environment, market yields can be expected to rise, mainly as investors demand higher returns during transactions of investment properties. Market yields tend to lead valuers’ cap rate assumptions, but valuers’ cap rates tend to be at a tighter range of less than 100 bps during the last market cycle.