Malaysia’s IOI Properties Group has emerged as the top bidder for a white site at Central Boulevard in Marina Bay. The group put in a bid of $2.57 billion, or $1,689 per sq ft per plot ratio, a whopping 16% higher than the next highest bid by Mapletree Investments, at $2.21 billion, or $1,451 psf ppr.
A total of seven developers contested for the site. Nanshan Group, which was tipped to have triggered the site, came in third with an offer of $2.19 billion, or $1,438 psf ppr.
The median bid for the Central Boulevard site stood at $2.13 billion, or $1,398 psf ppr, and came from Hongkong Land and Cheung Kong Property Holdings partnership.
All consultants attribute the strong bids to a long-term confidence in Singapore’s office market, underpinned by the country’s solid fundamentals. The site has a maximum gross floor area of 1.52 million sq ft, of which at least 1.08 million sq ft must be set aside for office. Retail use, which includes shops and restaurants, is capped at 53,820 sq ft. The remaining GFA can be used for more office space, hotel, serviced apartments and/or residential.
Still, IOI’s bullish bid means it is pricing the commercial component at a significant premium to Asia Square Tower 1, located next door. In June, sovereign wealth fund Qatar Investment Authority acquired Asia Square Tower 1 from BlackRock for $3.4 billion, or $2,668 psf on net lettable area. The site itself had fetched $1,409 psf ppr in a state tender in 2007.
Alan Cheong, head of research at Savills Singapore, says, “For this kind of mixed development, it is better to use the discounted cash flow method to analyse the site. At $1,689 psf ppr, the weighted cost of capital used to derive the net present value of the office component is about 4%, assuming the long-term rental growth for prime offices is imputed at just under 2% per annum from the current $10 psf per month.”
Cheong says a 4% discount rate is still decent because the consensus view is that interest rates, which may be tweaked up slightly, are expected to stay benign for the foreseeable future.
Tay Huey Ying, head of research at JLL Singapore, offers another perspective. “The bid price reflects the highest bidder’s confidence that prime office rents in the Marina Bay area will recover to the 1Q2015 peak of $12.90 psf per month or higher by 2021,” she says.
Tay also points out that the desire to develop a trophy commercial building in Singapore’s new downtown, amid the expectation of intense competition, means the tenderers have to outbid competitors by submitting an aggressive price.
Christine Li, director of research at Cushman & Wakefield, notes that developers could be encouraged by the recent pre-commitment rates for new projects such as Guoco Tower and Marina One.
Separately, a developer might not be worse off if it decides to include a residential component in the development. Desmond Sim, CBRE’s head of research for Singapore and Southeast Asia, says it is also possible that the top bidder has explored other uses, including selling residential units that might help improve their cash flows.
In addition, the saleable area for residential is usually higher than the leasable area for offices. Nearby, Marina One Residences fetched $2,308 psf on average this year. Meanwhile, Marina Bay Residences commanded an average price of $2,996 psf at the peak of the market in 2013. However, Additional Buyer’s Stamp Duty on land will be applicable if the developer fails to sell all the residential units by the stipulated deadline.
Other tenderers for the site include the CapitaLand and Great Eagle Group tie-up, and Yanlord Commercial Property Investments. A consortium comprising OUE, Guangzhou R&F Properties Co and Tang City Properties put in the lowest bid of $1.91 billion, or $1,256 psf ppr.