PROPERTY giant CapitaLand has been in exclusive due diligence with a view to buying Asia Square Tower 2 in Marina View from a BlackRock-managed fund. Word has it that the pricing is around S$2,800 per square foot (psf) on the net lettable area of about 780,000 sq ft.
Office market watchers will recall that CapitaLand was among the bidders for the next door Tower 1 back in 2015 but later walked out of discussions. BlackRock eventually sold Tower 1 in June last year to Qatar Investment Authority (QIA) for S$3.38 billion or about S$2,700 psf on net lettable area (NLA) of over 1.25 million sq ft. In absolute price quantum, this was the biggest ever office deal in Singapore.
The question is: Why is CapitaLand, which chose not to buy Tower 1, now pursuing Tower 2 - and at a higher psf price?
For a start, there were apparently some conditions on Tower 1 back then that CapitaLand could not agree to.
Another point is that the leasing market for new office developments such as Guoco Tower and Marina One has proven to be stronger than initially envisaged. Guoco Tower, with 890,000 sq ft of offices, received Temporary Occupation Permit (TOP) last September. Today, it is almost 90 per cent committed.
Marina One, with 1.88 million sq ft of offices across two towers, is also expected to be substantially committed by the time it receives TOP, possibly within the next few months.
Premium grade office rents seem to have bottomed and are perhaps even tipping upwards.
While concerns persist about whether there will be enough net demand to backfill space in older CBD office buildings that will be vacated by tenants leaving for newer buildings, the mood in the office market has improved dramatically over the past 12 months. From a sorry tale of massive oversupply with big new completions, it is now a story of growth and recovery.
Office capital values have also moved upwards. Many analysts say the catalyst was the landmark Asia Square Tower 1 transaction, which provided a benchmark for the Singapore office market not seen for some time.
The momentum was reinforced in November when IOI Properties Group from Malaysia paid a record land price of almost S$2.57 billion or S$1,689 psf per plot ratio (psf ppr) at a state tender to clinch a white site in Central Boulevard next to Asia Square.
Besides the mood swing, there are other important differences between Towers 1 and 2 that could be motivating CapitaLand to pursue Tower 2.
Firstly, Tower 2 has a smaller NLA and hence involves a small deal size, thus presenting a lower risk compared to Tower 1.
Moreover, despite its higher psf price, the net yield on Tower 2 works out to be higher, at nearly 3.5 per cent - compared with Tower 1, which was said to be slightly under 3 per cent factoring in Google's imminent departure at the time. Most of the ex-Google space has been taken.
The superior yield from Tower 2 is on account of its strong occupancy of about 95 per cent as well as leases signed on more landlord-friendly terms compared with Tower 1, where attractive terms would probably have been given to secure large tenants like Citi.
Another source of motivation for CapitaLand to revisit Asia Square is a chance to own prime Marina Bay office real estate. Unlike its rivals such as Keppel Land and Hongkong Land, CapitaLand does not have a presence in this upscale office micromarket.
CapitaLand's negotiations to buy Tower 2 are almost certainly set to involve its sponsored real estate investment trust CapitaLand Commercial Trust (CCT).
It is worth noting that CCT is expected to begin work later this year on redeveloping the Golden Shoe Car Park site into a project with about a million sq ft commercial gross floor area. That could be partly funded by sales of assets, such as Wilkie Edge in the Selegie area. An expressions of interest exercise for this retail-and-office property, with a net lettable area of about 154,000 sq ft, closed in January, with no news yet from CCT.
Wilkie Edge's indicative pricing was reported to be about S$293 million or S$1,900 psf on NLA.
Meanwhile, market talk is that another CCT-owned asset, One George Street, is under due diligence again by a potential buyer. This time around, the price is said to be S$2,700 psf; based on the NLA of 446,465 sq ft, the absolute price would be S$1.2 billion. The office development was last valued at end-2016 at S$1.014 billion, reflecting S$2,271 psf on NLA.
Divesting older assets and instead adding new prime Grade A buildings will help rejuvenate CCT's portfolio.
What's interesting also is that there is some speculation that once CapitaLand acquires Tower 2 of Asia Square, it could negotiate a deal with QIA for the two to take a stake in each other's tower. This cross-holding will reduce competition between the two owners for tenants, and provide leverage for CapitaLand to seek the rights to manage the entire development - which would be a neater arrangement than having each tower managed by a different party.
Given the host of reasons, acquiring Asia Square Tower 2 at this juncture makes sense to the CapitaLand Group.