AsianInvestor spoke to Tim Gibson, the head of property equities for Asia at Henderson Global Investors, about Singaporean commercial property.

Henderson has $18.5 billion of property assets under management. It has more than 190 people based around the world focusing on property, covering all aspects from asset management to market forecasting. The specialist property equities team has detailed knowledge of property equity markets globally and currently manages assets of $1.86 billion.

The Asia-Pacific Property Equities Team manages the Henderson Horizon Asia-Pacific Property Equities Fund as well as the Asian investments within the Henderson Horizon Global Property Equities Fund and other institutional mandates. In total, the team manages about $950 million in Asian property stocks.

What is the outlook for Grade-A commercial property in Singapore?
The Singapore office sector has continued its strong rebound in 2011 with recent data showing that the average Prime Grade-A gross effective rent increased 7.9% to $10.00 per square foot per month in the first quarter of the year.

This has been driven by a return in confidence to firms’ expansion plans, pushing up rents for office space which in turn has driven interest in investment sales.

The rise in capital values has continued unabated, partly due to the positive cost of carry, with current market yields compressing to 4.0%.

For retail, the international visitor arrivals to Singapore registered a 16.2% y-o-y growth in early 2011. This should bode well for retail sales, especially for prime assets. We would caution on rental growth from here due to already high occupancy cost ratios and a large amount of retail space on the market. With concerns over the residential market at the forefront of people’s minds we think rental growth and sales could suffer.

Is there still enough scope for developers and opportunistic property funds to generate profits to meet investment targets given the high land prices in Singapore’s CBD?
The availability of cheap debt has led to some very keen pricing for land in recent transactions. Most real estate players are awash with cash which has driven the market value of land up. This has had a knock-on effect to prospective profit margins which we think are beginning to look rather thin on a risk-adjusted basis. However, given favourable long-term fundamentals in Singapore, longer term investors should still be able to achieve a high single digit return.  

It is worth noting, given the discount to net asset values that listed companies currently trade on, there is now a disconnect beginning to develop between the direct market and some of the listed real estate names. When you consider that the listed markets also provide diversification, liquidity and exposure to some of the very best real estate, then the current pricing is attractive.

What is the status of property investors buying completed projects, say Reits or international pension funds. Is supply able to meet demand – and at what kind of price levels?
Pension funds and Reits are enjoying a low cost of capital, which is contributing to the strong appetite for commercial real estate. There are a number of pension funds which have no exposure or remain underweight to real estate.

In Asia, transaction volumes were up 14.2% year-on-year and 10.6% on the first quarter 2011 to $27.2 billion. Among the core markets, Singapore recorded the largest increase in volumes, surging 60% quarter-on-quarter to reach $4.0 billion.

Currently real estate provides a positive real return whilst at the same time a partial hedge to inflation; these are characteristics which are attracting a wide range of players to the market, pushing prices still higher.