Record land bid sparks optimism for office REIT

Demand for offices expected to normalize despite supply glut.

A record winning land bid of S$1,689 psf for a CBD land parcel on Central Boulevard - a 67% premium to the reserve price and 16% higher than the second highest bid - supports a positive outlook for office REITs, said Jefferies.

According to the research house, it suggests a normalization of demand and indicates room for further cap rate compression.

IOI Properties Group has bid the highest amount of S$2.58B for a 1.1-ha white site on Central Boulevard. This is the first land sale in Singapore's Marina Bay in nine years. The offer price, equivalent to S$1,689 per square foot of gross floor area, is a record for a Singapore government land sale, exceeding the earlier highest price set in 2007 when the adjacent land parcel, where Asia Square Tower 1 currently stands was sold for S$1,409 per square foot.

It is a 67% premium to the reserve price of S$1.54B, and a 16% premium to the second highest bid of S$2.2B from Mapletree Investments.

The reserve site was supposedly triggered by Nanshan Group Singapore who placed the third highest bid of S$2.18B.

Comments from news articles suggest that the developer is contemplating an office-only development on the site which can yield about 1.29M sq. ft. of office GFA.

Here's more from Jeferries:

Supports a positive outlook for office REITs in the medium term - The 67% premium to the reserve price did come as a positive surprise to us. We had earlier highlighted in our periodical that our channel checks suggest bids in excess of 30% premium to the reserve price.

While the sub sector is facing an excess supply situation currently, developers are expecting demand levels to normalize in medium term. Since 2014, annual net absorption has ranged at 200K-400K sq. ft. versus the historical average of 1.1M sq. ft. CCT's proposed redevelopment of Golden Shoe Car Park, along with the development at Central Boulevard site, would stretch the million plus supply pipeline well into 2021.

Room for further cap rate compression - Break-even price for the development is likely to range at S$2,700-2,800 psf. At the current annual net Grade A rent of S$90, indicative NOI yield is about 3.2-3.3% versus current valuation cap rates of 3.75-4.25% for listed office REITs with Grade A buildings in their portfolio.

Earlier this year, BlackRock had sold Asia Square Tower 1 for S$2,700 psf on NLA to Qatar Investment Authority and is currently seeking bids for Asia Square Tower 2. It will be interesting to see at what price the office block changes hands and compare this against any comments on development margins for the proposed development.