As the dust starts to settle, it may be time for investors to get ready – by exploring new concepts and ideas to build resilience and flexibility.
COVID-19 has undoubtedly caused a significant impact on many sectors globally and – perhaps unsurprisingly – the local real estate sector was not spared from the after-effects of the lockdowns. As Singapore eases into Phase Three of the three-phased circuit breaker and with the pandemic seemingly in the rear-view mirror, it may be time for investors to shift their focus to the local real estate market. How would the impact affect real estate in the years to come? What developments can we expect to see in rebuilding investors’ confidence in the industry as it gets back on its feet?
Is there still opportunity in investing in office and hotel assets? In this Real Estate Market Outlook, Capital Markets and Investments Services expert, LingWei Kong (LW) sat down with Managing Director, WeiLeng Tang (WL) and Head of Research Tricia Song (TS), to discuss where investment opportunities lie for freehold and leasehold office assets from here and beyond.
LW: With a limited supply of freehold office assets in the CBD market, what is the benefit case for leasehold office assets?
TS: Most of the newer and better-looking buildings tend to be leasehold. 100% of Marina Bay's prime area are leasehold properties, as they are all from government tenders, and they also fetch better rents.
"… there is no doubt that hotel assets will remain attractive. The key concern here, however, is timing."
Uniquely, much of the land for Singapore’s Central Business District is reclaimed and purposefully planned by the Urban Land Authority (URA), which helps make leasehold office buildings thrive better than other areas. However, the challenge with leasehold properties from an investor point of view is the financing and the title expiry/reversion.
The rapid pace of change with technology challenges many buildings' relevancy, be it their economic, functional and physical life. Having an active asset management is more important than ever to drive demand (income) and building lifecycles (cost).
The yields and returns for leasehold properties could be superior compared to freehold, due to the lower upfront costs and upside rent. Yields for freehold are typically 2% or below, while yields for leasehold generally are over 3%, and some have redevelopment potential.
Regardless of land tenure, the office as a sector has a very positive outlook. With resilient occupier demand in particular sectors, rents will track a rebound in GDP or even outperform it as history has shown, especially given that the future supply is below historical average levels.
LW: With the CBD re-developments, hotels will likely be in the mix. This sector has been hit the hardest, but with recent positive developments on a COVID-19 vaccine, are we too late to invest in hotel assets, or should we wait further?
WL: Yes, indeed. Stock markets have reacted positively to the news even though we are not out of the woods yet. It might take a while for a full recovery and return in confidence. But will it be too late then?
The key question here really is: Will people ever stop travelling?
"There is a growing interest in healthcare-related real estate, take, for example, Orchard Hills, which is an interesting new asset that has healthcare integrated with hospitality– from conceptualisation, design and lastly, development."
The answer is clearly no, which means hotels will be needed. Many hotel operators are currently struggling to keep their doors open, with some of them already brought to their knees. However, we can surely expect more operators to return. How will hotels then transform to be more resilient? Will the space be versatile enough to be repurposed quickly into office workspaces or perhaps even, a healthcare facility?
An interesting conversation I had with an investor said that hotels/serviced apartments can quickly transform into hospitals, with event-specific spaces as operating theatres and rooms as wards. I can definitely draw the parallels between the two types of spaces. Although this might be depicted as a worst-case scenario— perhaps in the event of a crisis or pandemic — it certainly is an interesting viewpoint that should be given thought. With that said, there is a growing interest in healthcare-related real estate, take, for example, Orchard Hills, which is an interesting new asset that has healthcare integrated with hospitality– from conceptualisation, design and lastly, development.
Revisiting the question of whether hotel assets will remain attractive, there is no doubt that hotels will remain attractive. The key concern here, however, is timing. With recent buzz surrounding a potential working vaccine for COVID-19, I would recommend investors to start reviewing hotels now, as time will be needed to explore new concepts and ideas to build resilience and flexibility, as well as negotiating the price and terms. It is a better time to do so now than compared when these factors were better defined and set-in-stone.
TS: On a macro-level, Singapore has made a lauded effort – and one with great results – in keeping the pandemic under control locally, so the global community should have greater confidence, which bodes well for Singapore hospitality and travel industry in the long term (i.e leisure travel, corporate travel, MICE events). These long-term developments in Singapore will undoubtedly help to boost tourism in the years to come.
There is also not much new supply coming onstream in the next few years, with about 2% annual increase in hotel rooms versus the 10-year average of 6%. In fact, due to what happened, some of the planned hotel developments may not materialise at all, so the actual supply could be even lower than expected.
WL: We could see a potential supply crunch with the recovery of post-pandemic travel. While the number of business travels might be reduced with improved video conferencing technology, will people give up on vacations or holidays?
I anticipate robust pent-up demand when the pandemic blows over, and especially with vaccines in place. Investors can very quickly enter the hotel space, as hotels in Singapore can range from the opulent to budget ones, with some even taking on the unique form of shophouses.
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- Revitalising Retail and Heritage Shophouses
- Hybrid Hospitality - A New Win-Win?
- The State of Travel is on the Road to Recovery
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