Much has been said about a need for a regulatory body for estate agents to protect buyers and sellers from rogue agents, and understandably so.

However, when Ms Xie Ruzhen states that she felt she had been duped into signing an agreement requiring her to pay her agent a 1 per cent commission when the industry’s standard commission guideline for the seller’s agent is a 2 per cent commission (particularly for HDB), something has gone amiss.

How was she duped into signing a contract that allowed her to shortchange her agent of his commission by half? She also said she had intended to pay only a 0.5 per cent commission after having recently forked out a 2 per cent commission to the agent for his service in selling her previous flat.

Does she feel that since she had already paid him a fair commission previously, she now had the right to pay him less?

As an agent who plays by the rules and am always open and honest with my clients, like many of my fellow agents, I am appalled by the actions of less ethical counterparts who have given our industry a bad name. However, this does not give parties like Ms Xie the right to undermine our worth and the services we provide. My advice to home sellers and buyers is, if you do not think your agent is worth his commission, then he is not the agent for you.

The market rate is 1 to 2 per cent commission, so if you cannot even bring yourself to pay your agent the minimum 1 per cent, then find another agent you feel is worth his commission. After all, there is no shortage of agents.

Medalina Barber (Ms)

Source : Straits Times – 25 Sep 2009

CITY Developments Ltd (CDL) is said to have begun selling the first phase of the 956-year leasehold Hundred Trees condo in the West Coast area at an average price of $895 per square foot.

In full bloom: The development takes its name from some 100 pink mempat trees that will line the project’s walkways

Buyers can opt for an interest absorption scheme (IAS) – but they’ll have to pay 2.5 per cent more.

About 150 of the project’s total 396 units are believed to have been released under the first phase.

Sales to former owners of the Hong Leong Garden Condominium – from whom CDL bought the site through a collective sale in 2007 – began yesterday. CDL staff as well as special guests were also invited to purchase units at Hundred Trees yesterday.

The preview for other buyers who had pre-registered interest in the development begins today.

BT understands that one and two-bedroom apartments, and two bedroom-plus-study units make up around 40 per cent of total units in the 12-storey condo.

Prices of one-bedders, which are about 485 square feet, begin from over $500,000. Two bedders range from 690 to 786 sq ft while two-plus-study units are between 915 and 1,227 sq ft.

‘With a relatively large proportion of smaller units, the absolute price quantum per unit has been kept relatively affordable,’ a market watcher said.
Hundred Trees’ average price is below earlier expectations in some quarters of about $930-$980 psf.

However, it is higher than the recent transactions in the West Coast area, noted analysts. Over the past few months, units at Botannia and Carabelle (both completed this year) have sold at a median price of about $800 psf while units at The Parc Condo, which is still under construction, have changed hands at a median price of about $850 psf, according to caveat data.

Analysts’ estimates of CDL’s pre-tax earnings from Hundred Trees vary widely, from about $75 million to $135 million, depending on the efficiency ratio (ratio of the project’s total saleable area to gross floor area) and construction cost assumptions.

CDL paid $131.5 million for the 266,076 sq ft Hong Leong Garden Condominium plot. This worked out to about $363 psf of potential gross floor area inclusive of development charge, which was reported at about $23 million at the time.

The site is zoned for residential use with a 1.6 plot ratio. Some analysts have suggested that CDL’s breakeven cost could be below $700 psf.

Hundred Trees takes its name from some 100 pink mempat trees, dubbed the local version of Japan’s sakura or cherry blossoms, that will line the project’s walkways. The location is popular with the Japanese community; there are Japanese schools nearby and Japanese restaurants in the Hong Leong Garden Shopping Centre next to the Hundred Trees site.

Although IAS was scrapped on Sept 14, a developer can still offer the scheme for a project if the developer and its partner bank have entered into an agreement before that date to offer IAS for the project and the developer has already offered units in the development for sale under IAS before the same date.

Other projects expected to be previewed in the coming weeks include Far East Organization’s Alba, a 50-unit project at Cairnhill Rise that will have a ‘white plan’ similar to the group’s Boulevard Vue project at Cuscaden Road where apartment layouts can be customised to individual buyers’ preferences.
Far East is also expected to preview soon its 278-unit freehold Cyan condo at Keng Chin Road in Bukit Timah.

Starlight Suites at River Valley Close and Ho Bee’s Trilight at Newton Road are also expected to be released soon.

By Lim Wei Chean

Resorts World at Sentosa is banking on the appeal of two mega-movie franchises – Shrek and Madagascar (left) – to draw the crowds next year. — PHOTO: SENTOSA RESORTS WORLD

RESORTS World at Sentosa (RWS) is banking on the appeal of two mega-movie franchises – Shrek and Madagascar – to draw the crowds to its theme park when it opens in first quarter of next year.

Six attractions at the integrated resort’s (IR’s) 20ha Universal Studios theme park will be based on the storylines of the two DreamWorks Animation films, according to details released on Thursday by the developer.

Visitors will get to see sets and characters from Shrek come to life, including the Far Far Away Castle belonging to Princess Fiona’s father.

They will also get to experience rides based on the adventures of four animals from New York’s Central Park Zoo who are shipped to Africa by accident and left stranded on Madagascar.

There will be more than 10 retail and dining outlets done up in the same themes as the two respective zones.

The two movies are among DreamWorks’ most successful box office hits, with Shrek and its two sequels grossing over US$2 billion (S$2.8 billion) worldwide, and the first Madagascar film alone taking in $500 million.
RWS chief executive officer Tan Hee Teck said the films are popular with Asians.

Prices for the theme park will be announced later, but The Straits Times understands they are likely to be on par with, or even cheaper than, tickets to Universal Studios theme parks elsewhere. A day pass to the park in Orlando costs US$70 and Osaka charges 6,000 yen (S$92).

The theme park – the first of its kind in South-east Asia – is expected to be one of the IR’s biggest draws. The second IR, the Marina Bay Sands, is gunning for well-heeled business travellers.

Details of 18 other attractions at the Sentosa IR’s remaining five zones – Sci-Fi City, Ancient Egypt, The Lost World, New York and Hollywood – will be announced later. An RWS spokesman said the IR is on track for its soft opening in first quarter of next year.

WITH the recent home buying spree, one pertinent issue is how to pick the best home loan from among the dozens on the market. What with all the different plans and reams of fine print to go through, the search for the right home loan can often be a headache. Here, online websites can be a boon by making comparison of features easier. Check out smartloans.sg which has details of home loan packages from eight banks – HSBC, Standard Chartered, Rashid Hussein Bank (RHB), Maybank, UOB, OCBC, POSB and DBS.

The fixed rate package from Stanchart and floating rate package from HSBC are currently the most popular among users of the website. And it is constantly trying to add new banks to the list, with talks now ongoing with Citibank Singapore. Smartloans.sg’s chief executive Vinod Nair says he expects the bank’s packages to be listed on the website soon.

While the large variety of loan schemes available may leave many house buyers confused, Mr Nair says that there are a few things to keep in mind. ‘It depends on why you are buying the property. If you are buying it for investment purposes, you should take the floating packages because there are usually no lock-ins for floating rate packages. Also, they are usually pegged to rates like Singapore Interbank Offered Rate (Sibor), which should remain fairly low in the next one to two years,’ he says.

‘If you are planning on taking on a long-term tenure for your own occupation, it might be better to take up fixed rate packages, which offer greater comfort to borrowers because of the certainty it provides. Also, most people usually refinance their mortgages, so as long as you refinance your loan every three years to ensure that you get the best rates, it should be worth it.’

BT asked some of the banks about their most popular home loan packages and their features.

‘If you are planning on taking on a long-term tenure for your own occupation, it might be better to take up fixed rate packages, which offer greater comfort to borrowers because of the certainty it provides.’
- Smartloans.sg chief executive Vinod Nair

Citibank: Sherry Leong, Citibank Singapore business head for home financial services, says its Citibank Home Saver has always been a popular choice with clients. Home Saver is an index-linked home loan that offers borrowers the widest selection of index tenors in the market – from one-month to three years. The indexes linked to its loans include the one-month and 12-month Sibor.

Clients also have the flexibility to switch from one tenor to another on the maturity date, enabling them to decide on fixed or floating rates, depending on their view of interest rate trends, she says.

For instance, clients can take advantage of the low one-month Sibor now and then change to a 12-month Sibor later if they feel that interest rates are likely to rise, thereby fixing the rate on their instalments for that period. In addition, Home Saver comes with an interest-offset feature that helps borrowers pay down their home loans faster. Clients can put deposits into the offset account to earn an adjustment currently at up to 70 per cent of their home loan rate. This adjustment reduces the interest payable on the home loan, thereby helping clients reduce their principal outstanding faster. The offset account is an all-in-one home loan, checking and deposit account with a debit card.

‘Our clients also tend to use this as their main salary and transaction account to maximise their benefits from this feature. This feature will also appeal to customers who may have cash in hand but don’t want to commit all of it to a property in case funds are needed for other investments,’ says Ms Leong.

For owner occupied property, the maximum financing is 90 per cent though Citibank customers usually borrow up to 80 per cent, she said. Investment buyers, depending on their profiles, need to pay between 20 and 30 per cent cash downpayment, she said.

On valuations, Ms Leong says the bank noted that new launches command a slight premium above older properties and this is particularly telling when the property is leasehold.

HSBC: At HSBC, the leading home loan which is available till Sept 30 is its relationship-based package with an attractive interest rate of Sibor plus one per cent throughout the loan tenor. It is on offer to all existing HSBC customers as well as new customers who start banking with them. There is no lock-in period for the package.

This package comes with deals and discounts in recognition of customers’ relationship with the bank, said Sebastian Arcuri, HSBC’s head of personal financial services. ‘We are the only bank in the market to adopt a relationship-based approach that rewards customers for maintaining their relationship with the bank,’ he says.

Their Sibor-pegged loyalty and relationship-based Sibor packages are the most popular, with 90 per cent of home loan customers choosing these packages. Its Sibor- pegged loyalty package rewards customers for keeping their home loan with HSBC, by offering them a year-on- year decrease in the interest rate spread charged in the first three years.

Maybank: While the current economic climate seems to favour floating rate packages, Maybank Singapore says that its three-year fixed rate package is still preferred by its clients as it offers them peace of mind.

For its three-year fixed rate promotional package, the bank offers a fixed rate from as low as 1.6 per cent, after which the rates will be pegged to the Singapore residential financing rate (SRFR), which is currently 3.75 per cent. This applies to both completed and uncompleted properties, and HDB and private residential properties. There is no minimum loan quantum. Maybank offers free one-time repricing to its prevailing home loan packages, normally not found in fixed-rate loan packages in the market.

‘As property purchase is a long-term commitment, we would advise customers to take a long-term view and go for regular instalment payment comprising principal and interest payment. This is also in view of the relatively low interest rate environment currently,’ says Maybank’s head of consumer banking Helen Neo.

OCBC: Packages offered by banks come in two forms: fixed rate and floating rate. For fixed rate packages, the interest rates are fixed for the first few years of the loan. The interest rates generally tend to be higher than those of variable rate packages, says OCBC’s head of consumer secured lending Gregory Chan. The benefit is the protection it can offer against future interest rate hikes.

Floating rate packages are pegged to the bank’s respective reference rate – typically influenced by the prevailing market conditions – and banks can change the rates at their sole discretion. ‘Such packages generally lag behind interbank rate movements and are relatively less volatile compared to market pegged packages such as Sibor or Swap Offer Rate (SOR) pegged packages,’ says Mr Chan.

‘For investors who do not intend to keep the home loan for an extended period, they may prefer floating rate home loans as compared to fixed rate home loans, which come with pre-payment penalties for early settlement and partial pre-payments,’ says Mr Chan. ‘Hence, the final decision lies with the preference and interest rate outlook of home buyers.’

Currently, the floating rate packages such as the SOR- pegged home loans are preferred over the fixed rate packages at OCBC given the low interbank rates currently, and the depressed outlook for the rates in the medium term. The bank offers up to 90 per cent for financing of property purchases – though at higher rates compared with financing 80 per cent of a home.
Stanchart: The bank has a variety of Sibor-linked, fixed rate and floating rate packages, including MortgageOne Sibor and MortgageOne Optimizer that provide an offset feature where customers can use the interest earned on their deposits to reduce the interest payable on their home loans.

In the last two months, more than 50 per cent of their customers took up the fixed rate packages, including the 1.5 per cent one-year fixed rate package introduced in conjunction with the bank’s 150th anniversary, says Dennis Khoo, general manager, retail banking, Standard Chartered Bank, Singapore.

‘We also see strong interest in the three-month Sibor- based packages as customers prefer interest rate transparency and enjoy the flexibility of making repayment anytime without any lock-in period,’ he says.
He advises home owners to look at mortgage insurance as well. ‘A mortgage is the single largest financial commitment for many Singaporeans and it is important that we accord the same value, if not more, in protecting our homes, as much as in purchasing and building them,’ says Mr Khoo.
‘Customers should consider signing up for a mortgage reducing term assurance (MRTA) plan as it provides protection and gives them peace of mind when planning for a home purchase and the future.’

The bank offers both single-premium and regular premium MRTA plans. MortgageCover, a single-premium MRTA plan, offers a convenient and affordable solution as customers can choose to finance the single premium together with their mortgage loan, without the need to maintain a separate insurance plan or payment plan.

The insurance plan provides customers coverage for the entire loan amount from the onset and will help to alleviate the financial and emotional burden of the home owner and his family in the event of an unforeseen event.
Customers also have the option of a regular-premium MRTA plan, Mortgage Protect, if they prefer flexibility in payment to match their cash flow.
UOB: SOR packages are popular at UOB currently, says the head of its loans division, Chia Siew Cheng. Its promotional one-month SOR with one-year constant monthly instalment plan, for instance, allows customers to fix their monthly instalment for a year, regardless of interest rate movements.

Customers can continue to fix their monthly instalment for a one-year period for subsequent years as the constant monthly instalment will be re-computed based on the remaining tenor and interest rates. ‘If interest rates move up, customers can be assured that their monthly cash flow will not be disrupted. If interest rates decline, customers can pay off more of the principal amount,’ says Ms Chia.

Another popular package is UOB HomePlus, which allows customers to earn the same interest rates on their deposits in a UOB i-Account of up to 75 per cent of the amount the bank loans to the customer. This gives its customers the option to use the deposit interest earned to offset the interest they have to pay for their loans.

UOB currently has a promotional HomePlus package, which offers rates with deposit interest matching of up to 33 per cent of the amount on loan to a client. ‘Depending on the deposit amount maintained in the UOB i-Account, the implied interest rate payable for a customer’s loan can be as low as one per cent per annum in the first year and up to 3 per cent per annum in the third year,’ says Ms Chia. UOB finances up to 90 per cent of the purchase price or valuation price of the property – whichever is lower – for owner occupation purposes.

SOUTH-EAST Asian investors are starting to scour Australia’s hotel market in the hopes of finding similar value to the hotel investments they made in the mid-1990s. It can be said that Asian investors were net real estate buyers between 1994 and 2003 before turning into net sellers between 2003 and 2006. That sell period was correlated to an improvement in hotel performances, lifting asset values, together with an appreciation of the Australian currency. This resulted in investors realising handsome capital gains when repatriating the funds back to their homeland.

Fast forward to September 2009 and a repeat cyclical trend may possibly be emerging. Indeed, as identified in the table above, all of the major hotel transactions that took place over the last 12 months are attributable to South-east Asian investors including Singapore’s Hotel Grand Central, Thailand’s TCC Land and Malaysia’s TA Enterprises Berhad. Notwithstanding the sale of the Westin Melbourne, hotels have transacted between A$190,000 and A$320,000 (S$234,717 and S$395,313) per room. Based on anecdotal evidence, this would appear to represent an, at times, steep discount by reference to full replacement value (after factoring land cost).

Cushman & Wakefield is aware of a number of hotel properties available to investors, both on and off-market, at the ‘right’ price. While Australian hotels may have been slow to transact in recent times, a pick-up in activity is expected in the coming months. But let us first ask the obvious questions – why hospitality and why Australia?

Australian hotel investment – land of opportunity?

The hospitality industry holds a very distinct space in the real estate sector. Indeed, while hotels are located within a physical structure, much in the same way offices are, the similarity ends there. Hotels are businesses with income levels varying on a daily basis for a number of reasons: some in – and some out of – the manager’s control. Such potential unpredictability in the income pattern can cause nervousness among investors. However, following careful analysis, investors in the hospitality industry can reap significant rewards in terms of total returns as well as diversification within an asset portfolio.

As with most industries, the hospitality sector overall suffered some setback in recent times, although the extent of the impact has differed depending on the type of market. However, in line with the overall economy, some ‘green shoots’ are starting to appear, which may open the doors for astute investors to enter the sector. The following paragraphs will concentrate on the Australian hospitality industry overall and that of its four main cities – Sydney, Melbourne, Brisbane and Perth – in particular.

Firstly, let us take ourselves back a few short years to a time when credit and capital was relatively readily available and investors’ sentiments were sky-high.

The ‘old’ paradigm
The ‘old’ paradigm is a combination of circumstances that resulted in most hotel assets increasing in value:

• Strong performance levels in the form of rising occupancy and achieved average room rates (ARR), which led to increasing revenue and Ebitda;
• Competitive lending conditions whereby banks and financial institutions relaxed some of their investment parameters in the form of higher loan-to-value ratios (LVR); and

• Positive investment sentiment towards the hospitality sector illustrated by a number of Australian institutions taking a position in the sector. As a consequence, a number of assets transacted, culminating in December 2007 with the sale of Australia’s most valuable hotel (on a per-room basis), the 158-room Park Hyatt Sydney, for nearly A$1.3 million a room.

The ‘new’ paradigm
The ‘new’ paradigm is a volatile environment where uncertainties in terms of availability of capital and business conditions dominate. By reference to the old paradigm, the new paradigm exhibits the following characteristics:

• Declining performance levels driven primarily by a softening in demand for transient accommodation, which has a downward impact on revenue and Ebitda;

• A return to stringent lending conditions whereby lenders, compelled to deleverage, are tightening their criteria, forcing investors to reduce their LVR and placing a renewed emphasis on interest coverage ratio; and
• Subdued sentiment towards the sector as investors shy away from the perceived risks associated with the industry.

This has a significant impact, not only on asset values, but also on hotel transactions. From the ‘dizzying’ heights of 2006 and 2007 when well in excess of A$1 billion worth of hotel assets was transacted each year, only A$750 million worth of major hotel assets was transacted in 2008. And 20 per cent of that total was derived from the A$160 million sale of the Westin Hotel in December 2008.

Even so, the new paradigm is also opportunistic for those investors holding a long-term investment strategy. Indeed, investors, financiers and operators are all getting back to basics. And in terms of market fundamentals, Australia’s star is shining that little bit brighter.

Firstly, from an economic standpoint, after weeks of uncertainty, the news came out in June that Australia had avoided the dreaded ‘R’ word after growing by a stronger-than-expected 0.4 per cent in the March quarter. That was followed by a further 0.6 per cent increase in GDP in the June quarter.

Is Australia out of the woods completely? Maybe not, but it is certainly regarded positively among the developed economies. In addition, from a political standpoint, Australia is perceived as safe, with transparent commercial guidelines conducive to foreign investment, as exemplified by the recent acquisition of well-known hotel assets by South-east Asian investors such as Hotel Grand Central Ltd and TA Enterprises.

Other aspects to consider when investing in Australian real estate are movements in the Australian currency, yield levels and the interest rate environment.

Secondly, Australia’s hotel industry is in far better shape than that of its neighbours’. While it is indisputable that performances have weakened over the last 18 months and are likely to continue doing so over the short to medium term, the extent of revenue per available room (RevPAR – which is a measure of occupancy and ARR, and therefore also of value) decline for Australia’s major cities is significantly less to that reported in China and India.

Thirdly, compared to the downturn of the early 1990s, banks are working with current asset owners to navigate potentially treacherous times and avoid a repeat of the dreaded fire-sale period that sent values into a downward spiral. Contrary to America, where distressed asset sales have been skyrocketing in recent quarters, lenders have so far been prone to work with their existing clients and trade through those difficult times.

However, the underlying message remains one of deleveraging and repricing of risks. Anyone with a refinancing deadline is aware that the combination of declining hotel value and lower debt levels is unsustainable. Hence, we believe that the Australian hospitality market is on the cusp of a new wave in the transaction cycle.

Lastly, the South-east Asian banks have escaped largely unscathed from the global financial crisis and may have some surplus cash to support their compatriots’ investments in the Australian property sector.

The ‘future’ paradigm
From a trading perspective, some may say that Australia has come back to more ‘normalised’ conditions with occupancy levels in the major CBD markets reverting back to a long-term average of around 75 per cent; a level superior to the performances achieved in the majority of Asia’s commercial hubs. And at the very least, while most Australian cities experienced a softening in demand, there is limited new supply over the short-term horizon, which is likely to limit any decline in occupancy levels.

The only exception is Melbourne, which is currently experiencing a boom in supply with over 2,500 rooms coming onstream by mid-2011. Looking ahead, the current lack of credit is also limiting the potential for new hotel construction, delaying the onset of a new supply cycle and providing some opportunities for hotel performances to recover.

From an investment perspective, the limited number of transactions in the last 12 months prove that a gap remains between buyers and sellers.

However, while some investors speculated early this year that passing yields in the capital cities would increase to 10 per cent, a few recapitalisations later, it seems that sellers in the market were at least able to fend off the more opportunistic offers. And the market took note.

To say that investors are eyeing one another to see who will make the first move is an understatement. How long is that cat-and-mouse game going to last? The number of hotels for sale, both on and off-market, demonstrates that some hotel owners, and primarily hotel funds, remain under some sort of financial pressure that may only be alleviated either by an outright sale, or by the injection of fresh capital.

In summary, investors are looking for reassurance. As such, prime assets in CBD locations will continue to dominate their wish list. Australia, as a safe destination with relatively sound economic prospects and lower hotel asset values than in South-east Asian capital cities, may therefore still be regarded as a land of buying opportunity.

The writers are senior manager; executive director, Cushman & Wakefield Hospitality; and regional managing director, Capital Markets respectively

AT FIRST glance, real estate investment trusts (Reits) watchers will be frustrated by the hung jury that has been the outcome for the first half of 2009. As of the end of August, of the 18 Reits with results in, half have reported distribution per unit (DPU) growth while the other half have reported an erosion of DPU.

Upon closer analysis, however, Phillip Securities analyst Lee Kok Joo noted that there are some sectors within the Reits area that have fared better than the rest. ‘The hospitality sector fared the worst with both Ascott Reit and CDL Hospitality Reit recording decrease in gross revenue as well as lower DPU,’ said Mr Lee in his report late last month.

Despite the blow dealt to the hospitality sector this year, a pickup in tourist arrivals is expected to help turn things around next year. DMG estimates that the weighted average yield for the hospitality Reit sector will pick up in FY2010 to 7.3 per cent, up from a forecast 6 per cent this year.

The industrial Reit sector also provided a reminder this year that DPUs and turnover could go in opposite directions. ‘For industrial sector, all four industrial Reits recorded lower DPU although only MacarthurCook Industrial Reit recorded lower gross revenue,’ Mr Lee added.

The office and retail sectors, however, have seen both revenue and DPU growing in tandem, benefiting from faster rent escalation and positive rental reversion from expiring leases, respectively.

Disparity where yields are concerned might be a good thing, however. OCBC Investment Research’s Meenal Kumar noted earlier this year in a report that ‘Suntec Reit is trading at a 300-point yield premium to CapitaCommercial Trust despite support from its retail portfolio and fairly similar gearing’, giving rise to arbitrage opportunities as soon as the smoke clears. ‘We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook,’ said Ms Kumar.

Volatile as the year might have been for Reits as an asset class, the consensus on its inclusion in investment portfolios is favourable.

A survey published by the Trust Company Ltd, a Sydney firm, found that real estate investment trusts in Singapore and Australia are expected to be the first in the region to regain ground lost during the economic downturn.
Singapore fared well in the survey because of optimistic prospects for growth of the property market, and great regulatory involvement on the part of the Monetary Authority of Singapore. However, Anthony Ryan, JPMorgan head of Asia real estate investment banking, cautioned investors against over-relying on the conventional wisdom of Reits being defensive plays.

At the CapitaLand International Forum earlier this month, he pointed out that in three separate periods – pre-crisis, during the crisis and post-crisis, Singapore Reits (S-Reits) have demonstrated an outstanding propensity to be high-beta investment vehicles.

During the ‘growth period’ of November 2005 to July 2007, S-Reits posted a compounded annual growth rate (CAGR) of 35 per cent, closely mimicking the Straits Times Index’s (STI) CAGR of 34 per cent. In the same period, Singapore property stocks posted a CAGR of 53 per cent.

During the sub-prime crisis, from July 2007 to December 2008, S-Reits promptly took the lead of Singapore property stocks, posting a CAGR of -43 per cent, against the latter’s -49 per cent. Debunking the expectations of Reits’ defensive play, the STI had a smaller negative return of 39 per cent during the same period.

Something that most analysts were able to agree on going forward was that Reits will have an easier ride on the credit front. ‘Indications from the various Reit managers indicate that borrowing margins continued to ease between 50 and 100 basis points,’ said CIMB-GK Research’s Janice Ding. The easing flow of credit will lay the groundwork for more acquisitions, most analysts reckon.

Ms Ding is favouring Parkway Life Reit and Frasers Centrepoint Trust as among the Reits making acquisitions within a 12-month period. OCBC’s Ms Kumar, who is neutral on the sector, has pegged Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as ‘likely candidates for an equity/acquisition two-for-one in the next six months’.

All said, the remainder of the year promises to be a quiet one by CB Richard Ellis estimates. ‘Most S-Reits are unlikely to make many new acquisitions in 2009 as dividend yields have increased significantly and it would be extremely challenging to make purchases that are yield-enhancing,’ it said.

THE office market here, like many around the world, has seen a fundamental shift in dynamics over the last nine months, with a marked drop in demand since the collapse of Lehman Brothers a year ago leading to a drop in rents. While all markets are cyclical, Singapore’s commercial property market has seen rental fluctuations that are typical of a more volatile market such as Hong Kong.

The reason for this is that many new developments were cancelled or delayed during the Asian financial crisis/Sars period in 2002-2004. The typical four-year construction period for a Grade A office building means that there is a lag in the supply pipeline, which was adversely affected from 2006-2008.

These were the years which saw a substantial increase in demand for office space. Much of it came from the financial services sector, partly as a result of the global growth of this sector and partly as a result of Singapore’s successful repositioning as a global financial services centre.

Jones Lang LaSalle’s research shows that from the bottoming out of the market in 2004 to the peak in Q3 2008, Grade A core CBD vacancy shrank from 11.6 per cent to 1.8 per cent and rents surged by 303 per cent. Post credit crisis, the negative take-up and concerns of over-supply have led to rents dropping by 48 per cent between Q3 2008 and Q2 2009.

Market sentiment tailed off rapidly between Q4 2008 and Q1 this year as occupiers began to give up space at the same time that some of the new developments were completed. The result is that the vacancy rate in prime Grade A buildings rose from 1.8 per cent in Q3 2008 to 6.1 per cent in Q2 this year.

A number of occupiers tried to mitigate part of their outgoings by either subletting or finding replacement tenants for their space. By June, ‘shadow space’ – currently leased space that occupiers are looking to dispose of, including space not available until 2010 – stood at 800,000 sq ft. If shadow space is included, the vacancy rises by about 30 basis points.

Part of the decline in sentiment has been caused by concern over future supply. Singapore has a larger than normal supply pipeline, especially in the core CBD. That said, there is an argument that in order to attract inward investment, Singapore has to constantly upgrade its office space offering and the new buildings coming to the market are, in the main, well specified and offer a significant upgrade to occupiers.

In the short term, net take-up is expected to remain low as there has not been any uplift in new office demand despite a less pessimistic economic outlook. Interestingly, the first two months of Q3 have seen significantly higher activity in the office market. There are two main reasons behind this increased activity.

Firstly, activity that is lease expiry driven. Given that the first wave of the long awaited new supply has now started to hit the market, there is some vacancy in the market and tenants now have real options. On the back of this we are seeing a discernible flight to quality in favour of the new developments ready this year.

The biggest roadblock to relocating today is a lack of budget for capital expenditure (capex). On the back of this, a number of active inquiries are focused on fully fitted ‘shadow space’ that negates the need for capex spend for fit-out.

Secondly, there are quite a number of large occupiers (50,000 sq ft plus) in the market who have been sitting on the sidelines for the last nine months for various reasons. They might not have been able to accurately predict their future headcount, lacked a capex budget, or else anticipated a weaker market ahead.

These occupiers are now coming to market as it has fallen significantly. Also, occupiers of this size would need to plan a move 12-18 months in advance, and this is close to the completion periods of new supply.

A significant number of these occupiers, especially those in the financial services industry, are also looking for enhanced specifications such as trading floors, enhanced power and air-conditioning provision and space for their dedicated equipment – back-up generators and air-conditioning, etc. The ability to supply such needs is limited and hence the first movers into a building have more chance of securing the specifications they need.

The increased activity is also being generated by the desire among some occupiers to secure branding rights (naming or signage rights) to the building they plan to occupy. The availability of this in the market is even more limited and hence occupiers will commit early in order to secure them.

Given the drop in rents and uplift in market sentiment on the back of both the global stock markets and local residential market, in the short term we expect to see the office market continue to be active. However, given the supply scenario, we expect rents to still face some downward pressure, albeit at a more muted pace, and much of the activity to be from consolidation or a flight to quality as occupiers upgrade.

The writer is regional director and head of markets, Jones Lang LaSalle

THE retail scene appears to be regaining some momentum after a quiet first quarter, thanks in part to the Great Singapore Sale, the opening of Ion Orchard and Orchard Central, and news about the high pre-commitment levels in upcoming malls. With the opening of Orchard Central and Ion Orchard, some 613,548 sq ft of space has been added to private stock along Orchard Road.

Shoppers’ delight: With the opening of Orchard Central and Ion Orchard, some 613,548 sq ft of space has been added to private stock along Orchard Rd. This has led to prime rents falling by 6%

This represents a 15.7 per cent increase to private Orchard Road stock in Q2 this year. As a result, the occupancy rate for Orchard Road dropped 11.5 percentage points from 95.3 per cent in Q1 2009 to 83.8 per cent in Q2. Average rents in the Orchard Road basket of prime retail space that CBRE tracks saw a 2.9 per cent dip quarter-on-quarter. As at H1 2009, prime Orchard Road rents have fallen 6 per cent.

There is no doubt that retailers are increasingly being challenged by the economic downturn that is driving down tourist numbers and local spending. Coupled with high overhead costs, retailers face the prospect of not being able to achieve their projected turnover. But this is probably a short term view of the situation. Fundamentally, there are factors working in favour of retailers.

Market talk has also been rife with concerns about supply looming in the two new integrated resorts (IRs) and how it would impact rents in Orchard Road and the rest of Singapore. Again, the concern of over-supply may be premature.

Some 1.1 million sq ft of retail space will be added to Orchard Road this year, an increase of 24 per cent to the current 4.5 million sq ft of Orchard Road retail space. Rents will inevitably come under some pressure as a result. But overall, new shopping space in Orchard Road will add a new dimension to the landscape. Shoppers can expect new store formats and fresh labels, giving retail a new look.

Shoppers can expect new store formats and fresh labels, giving retail a new look.

Let’s not forget that Orchard Road is a must-visit tourist spot. Its recent makeover testifies to the government’s commitment to keep it a premier shopping belt. And as a top tourist destination, prime Orchard Road shops will continue to command a premium in terms of rentals. Malls in Resorts World in Sentosa and the Marina Bay Sands will carve out a different niche.

The Marina Bay Shoppes, the retail section of Marina Bay Sands, is made up of 300 shops spread over 800,000 sq ft of retail space. Resorts World, which caters mainly to families and tourists, has about 330,000 sq ft of retail space. Combined, the two IRs would contribute about 42 per cent (1.13 million sq ft) to the 2010 supply pipeline to complement the many conferences and exhibitions that are expected to take place in Singapore.
What is encouraging is that many of the new malls already have high pre-commitment levels; Mandarin Gallery at 93 per cent ahead of completion, 313@Somerset is 90 per cent pre-committed and Knightsbridge 50 per cent pre-committed. This means that the vacancy rates in Orchard Road should move back to the 90 per cent level (from 84 per cent in Q2 2009) within a year, once tenants have moved in and started operations. Recently, Marina Bay Sands announced that 75 per cent of its shops have been leased ahead of completion.

Historically, the take-up for retail space in Singapore has been supply-led. Retailers are typically attracted to take up space at new malls and the market usually finds its equilibrium a year after each peak in supply. Occupancy levels should hover between 80 per cent and the high 70s by 2011.

With local retailers (established as well as new-to-market labels) and foreign brands opening at the new IRs, the market should find its footing around H2 2012. Islandwide occupancy would likely return to a healthy 90 per cent by 2012.

What’s more important is that the new supply pipeline essentially pushes developers and landlords to be innovative, to provide some form of differentiation in mall formats in this highly competitive market. Now, more than ever, landlords are able to allot more space to shops to carry new-to-market brands, niche products and services. Start-ups have a chance to grow while local retailers can expand given the ample supply coming on stream.

Mandarin Gallery carries more than 30 new-to-market labels. The Ramp at Orchard Central has 30 shops which can be used as a launch pad for start-ups; some 6,000 sq ft of space at the new Parco@Millenia store will be set aside to showcase works of aspiring home-grown designers. Ngee Ann City is also revamping the former Sparks space into a chic lifestyle cluster that caters to young adults. TripleOne Somerset, the new kid on the block in the Somerset cluster, also promises to be a haven for new-to-market labels.
So far, the new Orchard Road malls have been able to command an average of $20-plus per sq ft per month, which is fairly healthy under the current economic conditions.

We earlier predicted that rents would fall by 15-20 per cent this year. However, we have since revised our forecast to a decline of 10 to 12 per cent for the year. Rental declines should be smaller at 6-8 per cent in 2010.
Several other positive signs point to a recovery in the long term:

• The government remains focused on achieving a target of 17 million visitors by 2015. Unless the retail landscape transforms to match retail hot spots like Hong Kong and Tokyo, Singapore will be hard pressed to meet the tourist arrival targets. Luxury brands are expanding their presence here in a big way, working towards a high concentration of luxury brands along Orchard Road. Spurred by the slew of budget airlines coming on the market, tourists will continue to find Singapore an attractive destination.

• Singapore is on track to attract foreign investment, which means expatriates will continue to take up residence here. International schools will see increased enrolments to achieve the target of 150,000 foreign students by 2012.

• The unemployment rate has stabilised at 3.3 per cent in June, unchanged from a quarter ago, despite the economy contracting 6.5 per cent in the first half of this year. Labour officials are confident that layoffs in Singapore can be kept from the highs of the Asian financial crisis and during the Sars crisis in 2003.

• A recent MasterCard survey on shopping habits during the Great Singapore Sale showed a one per cent increase in spending compared to 2008; a total of US$37.5 million was spent by MasterCard cardholders in the first weekend of the Great Singapore Sale. It is encouraging that most of the growth came from Singaporean cardholders – a sign that there is sufficient domestic demand to drive sales.

• Singaporean cardholders spent US$26.3 million in the first weekend, a jump of 7 per cent of receipts compared to last year, while tourists spent US$11.2 million, a dip of 12 per cent. Food and beverage (F&B) remains the top expense item. Retailers have long caught on to F&B as an area of growth. It remains a key segment, with Japanese food halls, quick service food kiosks and eateries proliferating at MRT stations. Informal eateries serving quality cuisine have cropped up in private residential estates. And many new and upcoming malls are tailoring their tenant mix to cater for more F&B outlets. For example, Ion Orchard will house 125 F&B outlets while about 35 per cent of Orchard Central’s tenants are F&B outlets.

The writer is director, retail services, CB Richard Ellis

INVESTMENT sales have been rising steadily throughout the year. From $304 million in the first quarter, transactions have jumped more than tenfold to $3.1 billion by Q3 of 2009. While we expect total transactions this year to be far below the 2008 total of $17.9 billion, coming in the wake of the global financial crisis, it will still be a credible result. Nearly half of the transactions have come from the residential sector while the commercial real estate sector makes up the remainder.

Recovering? As the MAS’ monthly banking survey shows, lending to businesses in the building and construction industry has remained stable with $50 billion in lending in January dropping slightly to $48 billion in July
Unlike the red hot residential segment, transaction volume in the commercial segment has occurred at a more measured pace. There was a 10-month lull in the office market before it stirred with the sale of Parakou Building and Anson House in April this year. Parakou was sold for $81.38 million, or $1,287 per square foot (psf) while Anson House transacted at $85 million with a psf price of $1,100.

VTB Building, Cecil House and Aviva Building were later sold for between $710 and $1,061 psf at transaction sizes between $36 million and $71 million, all to the same buyer. The buyer, a joint venture between Yi Kai Group and Fission Group, plans to redevelop the offices into a residential project, subject to approval. In the hospitality sector, the 50-room Hotel Nostalgia was sold for $22 million, or $440,000 per room – which represents a new high for boutique hotels.

These transactions, which led the resumption of the commercial investment market, had several common threads. The buyers were all private money, willing to put up higher levels of equity, and transaction sizes were below $100 million. In other words, they were nimble investors able to tap opportunities when others could not.

After this group of initial buyers, public companies and Reits subsequently stepped up to the plate. Fraser Commercial Trust acquired Alexandra Technopark for $342.5 million. In August, ARA’s newly set up Harmony Fund acquired the Suntec Singapore International Convention and Exhibition Centre for $235 million. A late August transaction saw Bursa-listed TA Enterprise buy the Swissotel Merchant Court Hotel for $260 million or $546,200 per room.

The buyers were all private money and transaction sizes were below $100m.

In early September, K-Reit Asia announced the acquisition of six floors of Prudential Tower for $106 million, or $1,579 psf, representing a yield of 5.2 per cent. The Prudential Tower acquisition provides a useful benchmark for prime office space transactions. Moving forward, we would expect near term office deals to reflect a stabilised yield of 5.2-5.5 per cent.

With the equity market rebound driving down distribution yields and the improved sentiment creating generally looser credit conditions, we expect to see Reits become more active in the investment market. They will want to take advantage of opportunities for structuring yield accretive acquisitions that will increasingly become more accessible with the recovering markets. The recovery extended to land sales as more developers replenished their land banks. They were apparently unfazed by measures the government took this month to cool the residential market.

A government land sale of a mixed residential/commercial site late last week saw a bid by Far East Organization at $376 psf of potential gross floor area. This was significantly higher than what the market expected. As buyer interest returns to the market, we expect to see in 2010, increased activity from institutional investors, both local and foreign, driving up transaction volumes.

The expectation early this year that pressured sellers would flood the market with assets did not materialise. With a significant amount of debt refinancing coming due this year, the expectation was that owners facing refinancing difficulties would have to sell. But property owners were able to manage those pressures through a mixture of renewed bank lending and cash calls from the equity market.

As the Monetary Authority of Singapore’s monthly banking survey shows, lending to businesses in the building and construction industry has remained stable with $50 billion in lending in January dropping slightly to $48 billion in July. With sellers gaining confidence, we have anecdotal evidence of asking prices being raised in the past couple of months.

An analysis of strata titled office transactions in Suntec City and The Central gives some indication that prime office capital values may have bottomed out and have started to rise. Transactions which clustered around the $1,400 psf mark in June/July have now risen to $1,600-$1,700 psf. This corroborates well with K-Reit’s $1,579 psf acquisition price for Prudential Towers in September.

While a dearth of transactions makes definitive analysis difficult for some segments of the commercial real estate market, the evidence does suggest that capital values for prime retail and hotel assets may have also bottomed out.

Transactions in the diverse industrial sector show an uneven trend but support the idea that valuations may remain soft. A vibrant commercial real estate investment market will emerge when the fundamentals of tenant demand and supply (and hence vacancy and rents) support the investment case.

On the supply side, the pipeline of new space over the next three to five years is transparent and generally predictable. Demand has historically been shown to correlate with various macroeconomic indicators of the Singapore economy. Singapore’s growth potential over the medium term is therefore important to the outlook of the commercial real estate investment market.

The good news is that consensus opinion believes global economic growth coming out of this slowdown would be centred in Asia. Singapore is well-positioned to ride this geographical advantage, as evidenced by our ranking as the third most competitive economy in the recently released World Economic Forum survey. Hence, there are grounds to believe that demand for commercial space will grow robustly over the next few years.

With this in mind, we think it is important to point out that as severe as the oversupply in some segments of the commercial market are, our simulations show that had Singapore not tipped into a recession, the new space would have been well absorbed. This suggests that the current challenges in the market are temporal rather than structural.

As the Singapore real estate market moves past these challenges, we see the continued strengthening of Singapore as a wealth management hub and the introduction of the integrated resorts as potential demand drivers across a broad spectrum of real estate assets. Myriad investment opportunities in the office, retail and hospitality segments will emerge as a result. Before long, we expect to see the return of a healthy investment market.

The writer is director, head of research services, Asia-Pacific, Cushman & Wakefield

The 80 per cent en bloc law made it possible for the private sector to take the lead in maximising the value of scarce land
By KARAMJIT SINGH AND PAMELA KOW

COME October, it will be 10 years since en bloc sales became a practical reality with the law that allowed an 80 per cent majority to decide the sale of a development, (90 per cent for those less than 10 years old). Before this, there had to be unanimous consent by owners for the sale of a development. To mitigate the effects of ‘majority rule’, safeguards were put in place to protect the rights of the non-consenting minority owners. The key tenet was that any deal must be entered in good faith.

Chip off the old block: The 1970s saw the introduction of larger scale high-rise condominium housing, with pioneering developments such as Pandan Valley (above). It was also during this period that HUDC started building affordable flats on a large scale for the then ‘sandwiched’ group of middle-income families. Among them were Farrer Court, Pine Grove, Gillman Heights and Laguna Park (next)

The new regulations were welcomed by many sellers, in particular those who felt held to ransom by a single dissenter in previous attempts, or who saw the entire exercise scuttled because one owner in the estate was uncontactable.

Since the change in the law, over 270 en bloc developments have been successfully sold. The average value of the deals was close to $100 million per development. This compares starkly to the average of $50 million for the 140 deals that took place from 1994 to 1999, before the law came into effect. While the increase in property prices did contribute to the increase, the ability to maximise development potential and extract value was the major factor. The projects sold under the old 100 per cent rule were typically no larger than 50-80 units.

Without the 80 per cent rule in place, embarking on the exercise for large developments with over 100 units was simply unthinkable. Just the thought of one owner being able to scuttle the deal was enough to deter the owners from slogging through the process.

Apartments, as the mainstay of private housing, began to be popular in the 1960s, shortly after Singapore’s independence. They were typically low rise, with the total number of flats in a development below 100 units. The 1970s saw the introduction of larger scale high-rise condominium housing, with pioneering developments such as Pandan Valley (over 600 units) and Ridgewood (over 400 units). It was also during this period that the Housing and Urban Development Corporation (HUDC), a unit of the government, started building affordable flats on a large scale for the then ‘sandwiched’ group of middle-income families. Among them were Farrer Court, Pine Grove, Gillman Heights and Laguna Park.

These projects are now close to 40 years old. Soon, they will start looking old and tired. In many countries, old and dilapidated buildings become breeding grounds for crime and vice. While this is not likely in Singapore, the real danger is that these developments may become enclaves of older Singaporeans. This is clearly not the way to go for a dynamic and vibrant Singapore.

In Europe, buildings built centuries ago still remain habitable, besides being rich in character, history and beauty. The city centres of London, Paris and Prague have buildings that are hundreds of years old. Sadly, this is not the case in Singapore. In the immediate post-independence period, the real estate and construction industry was not inspired to build legacies of lasting beauty, but instead put up affordable, practical homes. As such, not many buildings of the 1960-70s are serious contenders for preservation on architectural grounds; and they have little if no historical significance. It is mainly the colonial era buildings that the planners feel should be conserved.

If Singapore did not have the law that allowed for the majority of the owners to push through an en bloc sale, probably the only other way to rejuvenate these ageing developments would be for the government to acquire them compulsorily. However, the owners would at best be paid market value of the individual apartments, without any benefit of the redevelopment potential factored in. It would also bring the government into a sector where there is no immediate public interest at stake.

The 80 per cent en bloc law made it possible for the private sector to take the lead in maximising the value of scarce land, rejuvenating old developments and allowing owners, rather than the government or developers, to benefit from increasing property prices.

It must be conceded that the manner in which the 80 per cent legislation was drafted in 1999 was not highly elaborate nor perfect. But it was principle-driven and worked well for a good eight years. It got the job done in facilitating urban renewal. Maryland Point at Amber Road is now The Esta, a spanking new condominium. Eastern Mansion, which was probably one of the oldest apartment developments, is now Aalto, an almost completed luxurious condominium with unobstructed sea views. There are many more examples of how the urban environment was quietly transformed within years.

However, in 2007, the complexion of the en bloc sale process changed as the market heated up. There were mounting complaints that some majority owners were not entirely fair or transparent in their conduct. Minority sellers cried out for greater protection. Owners and developers got embroiled in litigation. Non-consenting owners challenged consenting owners in court. Developers threatened to sue owners who were attempting to back out of deals. The irony is that it was often the consenting owners who were fighting to back out of the very deal that they inked and were earlier championing.

Fights grew more intense with cases going all the way to the Court of Appeal. About 10 cases went to the courts, with half of them making headlines for the bitter feuding. All of a sudden, en bloc sales became synonymous with trouble, disharmony and disorder. The principle behind the 80 per cent rule began to be questioned.

The cases that went to court did not reflect the reality of the matter. During the property bull run in 2006 and 2007, as many as 162 en bloc projects were sold successfully; but it was largely the five to 10 troubled cases that dominated the headlines. This created the perception that the en bloc laws were flawed. Many watchers also attribute the intensity of the litigation to the large sums at stake in the contested cases, which were mainly developments which were sold when the market was rapidly rising.

The laws that had worked well for eight years suddenly seemed to need fixing. In October 2007, the government reacted by tightening the laws to raise the bar on transparency and accountability on the part of the majority owners handling the sale process, and further safeguards were put in place. While most of the changes were positive in that they ensured a greater level of disclosure, many felt that some provisions went a bit too far. The changes were in reaction to owners who protested about lack of transparency and accountability, complaints that, to a certain extent, masked the root cause of the contested cases – the lost profits and dissatisfaction when the market surged after the sale was struck.

As a result, owners who would have otherwise happily volunteered to serve in the collective sale committee, today fight shy of getting involved. The fear of being sued by minorities or purchasers and exposure to liability keeps them on the sidelines.

We believe the law makers should look towards moderating some of the new provisions. There is no way that any rule can please everyone. Democracy goes by majority rule. For minority owners who genuinely do not wish to be forced to sell their homes, perhaps the authorities could consider raising the threshold age of a development for which the 80 per cent rule would apply, from the current 10 years to 15 years.

That is, developments older than 15 years would require the consent of 80 per cent of the owners, while developments under 15 years would need 90 per cent or even 100 per cent consent. That way, these owners will have the certainty of not being approached by their neighbours for the next 15 years, when they buy a brand new development. It would also help to cut down the wasteful demolition of fairly new developments.

There are bound to be other approaches to renewal and maximisation of land use, but making en bloc sales difficult will take us back to the situation 10 years ago. Until a new solution is found, we need to ensure that en-bloc sales remain workable.

The writers are managing director and manager at Credo Real Estate respectively