Wear your hard hats: Developers tread with increased caution

Muted response for CBD site. The URA land tender for a commercial site along Robinson Rd and Cecil Street closed with only 3 bidders - Far East Organisation/Orchard Parade Holdings, IOI Properties and Frasers Centrepoint. Bidding range was a tight 4% from S$300.5-311.8m. Under the URA guidelines, the 31,560sf land parcel with potential GFA of 344,448sf; must comprise a minimum of 80% of office GFA and the remaining 20% for other commercial uses including additional office space. The development can be built up to 35 storeys.

Increasing cautious sentiment ….Response was lukewarm indicating a degree of caution on the back of the global macro uncertainties and potential knock-on impact on the office rental market. The winning bid of S$311.8m put in by Far East, translates to S$882psf ppr, is fair despite being below the lower end of earlier market expectations of S$995psf ppr and sub the $1,000psf ppr paid for the Tanjong Pagar land parcel (which comprises hotel/residential/office components). At this price, we reckon the cost to completion could be about S$1,700-1,800psf. However, on a yield perspective, based on current rents of S$8psf, this would translate to a yield of 4-4.2%, in line with current cap rates used by valuers in the June 2011 valuation for the Sreits and office landlords.

….but implied returns points to low rental volatility expectation. The transaction supports our view that any rental volatility on the back of global concerns and extended supply visibility is likely to be mild, expected to be -5% to -10% by end 2012, and that office values are likely to remain firm in view of the low interest rate environment.