BlackRock Singapore tower sale: third time lucky

Oversupply, Google leaving, a sluggish economy, and downsizing by financial and commodity-related tenants all weighed on BlackRock’s sale of the grade A office tower.

BlackRock looks set to sell a 43-storey office tower in central Singapore for S$3.4 billion ($2.45 billion) after twice being left standing at the altar.

The US investment manager said on Monday that it has agreed to sell the grade A office block in Singapore’s Marina Bay business district, Asia Square Tower 1, to the Qatar Investment Authority (QIA).

The deal provides a welcome boost to the sluggish office market in Singapore and is notable for its size as it marks the largest single-tower real estate transaction in Asia Pacific to date and the second largest single-tower transaction globally, according to property consultants JLL.

“Beyond that, it's very rare to be able to buy a building of this size and quality,” John Saunders, head of Asia-Pacific for BlackRock Real Estate, a dedicated property investment group within BlackRock, told FinanceAsia. In Asia most of the highest-quality real estate is held either by the listed real estate investment trusts or by listed developers.

But the sale has taken time and trouble to put together. Few investors investors globally could write such a large equity cheque. 

BlackRock first put the tower on the market in August last year for S$4 billion, according to a person familiar with the deal. “It was ambitious,” he said.

BlackRock noted that it had not spoken publicly about the deal before Monday and that the price is where it expected to be. “It’s a fair price for the asset,” said BlackRock’s Saunders.

The timing of the auction was not auspicious as the supply of office space is surging in Singapore as the economy sputters. Notably the Marina One development jointly owned by state funds Khazanah of Malaysia and Temasek of Singapore is scheduled to come on stream next year and will boast a net floor area of 1.88 million square feet.

CapitaLand, in a consortium with Norges Bank, came close to signing a deal for Asia Square Tower 1 but the listed Singaporean developer said in a statement on November 4 that it was walking away.

Then Singapore’s ARA Asset Management in a consortium with Korea Investment Corporation dropped out. One person familiar with the process said KIC’s decision was at least partly to do with a change in management at the Korean group, with Eun Sung-Soo becoming its chief executive in January.

Another blow to the deal was Google’s decision not to renew its lease in Asia Square Tower 1. The US tech giant decided a campus-style set-up would be more in keeping with its corporate culture than the office block, according to people familiar with the US group's thinking.

Around Singapore some banks and commodity companies have reduced their floor space to try and cut costs.

While Google is in the process of moving out, Citibank, the building’s anchor tenant since 2011, is staying put. It has a rent review coming up but has another five years on its lease, according to a person familiar with the contract. Other tenants include Bank Julius Bear, insurance broker Marsh, oil major Sinochem, and law firm White & Case. Lloyd’s of London also recently moved out last year.

Asia Square Tower 1’s occupancy rate is 83%, however BlackRock has a leasing deal about to come through that will quickly bump occupancy back up to around 90%. 

Turning point?

Some industry participants are saying this deal and other recent leasing agreements illustrate that Singapore’s office market is beginning to stabilise after a tough start to the year.

"It's a marker in the sand," said Stuart Crow, head of Asia Pacific Capital Markets at JLL. 

In the first quarter Singapore grade A office rents in the central business district registered their fourth quarter of contraction, falling at a faster rate, down 4.8% quarter-on-quarter to $9.90 or 13.2% year-on-year, according to analysis by CBRE. Net yield averaged 3.4%.  

“People seem to be overlooking the fact vacancy rates remain incredibly low,” said BlackRock’s Saunders.

Source: CBRE

The vacancy level was relatively low at 5.8% at the end of the first quarter, broadly inline with the 10-year average of 5.5%, according to CBRE.

Bank of Tokyo Mitsubishi’s decision to be anchor tenant at the Marina One complex is one such deal.

“The volume of new supply in tandem with no new tenants prompted some concerns. However, in the past few months more deals are being done in these projects, so maybe the market has found a floor,” said Jeremy Lake, an executive director in Singapore at CBRE.

“The stand-off between landlords and tenants is possibly past – we have a market again,” he said.

There is still plenty of demand for high-quality assets globally.

“We live in a world where interest rates are very low and likely to be low for longer, and yet there is still inflation,” said BlackRock’s Saunders. “In that kind of scenario people are looking for long-term high-quality cash flows which are inflation-linked – hence the interest in core buildings.”

Asia Square Tower 1 has over 1.25 million square feet of net lettable area. The sale values the property at S$2,720 per square foot. The capitalisation rate, better known in the industry as the cap rate, on Asia Square Tower 1 is 3.2%.

Asia Square Tower 1 commands the highest rents in Singapore’s office market, helped by the fact its floor plan is particularly efficient, meaning cost-conscious tenants can comfortably fit more people per square metre, according to BlackRock and industry sources.

“We’ve seen a lot of interest from a lot of groups from around the world in terms of the asset. It’s been a question of picking the right group,” said Saunders.

BlackRock takes opportunistic positions in property that needs repositioning or refurbishing, or as in this case a piece of land that needs developing from scratch. After managing Asia Square Tower 1 to “core level”, high occupancy, it was time to move on to the next investment opportunity, which is why the building was sold by BlackRock Asia Property Fund III. 

A similar transaction is CapitaLand’s acquisition last month for S$393 million of the remaining 60% stake in CapitaGreen, a 40-storey, grade A office tower in Singapore's central business district with an occupancy rate of 92.8%. At S$2,276 per square foot that was sold for a bit less than Asia Square Tower 1, mainly because only 57 years is left on the lease compared with more than 90 years on  Asia Square Tower 1.

CBRE and JLL are joint sole advisors for this transaction for BlackRock. 

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