One Done Deal, Two Around The Corner As Office Blocks Change Hands

Source : The Business Times, October 6, 2007

KeyPoint sold for $370m; talks on for 78 Shenton Way and Hitachi Tower

Office blocks continue to change hands as the market sizzles. Allco Commercial Real Estate Investment Trust has just bought KeyPoint in the Jalan Sultan/Beach Road area for $370 million or $1,186 per square foot (psf) of net lettable area (NLA). The deal includes income support of up to $10.5 million for two years to be provided by the seller.

Likely buyer: Industry observers suggest that a natural contender for Hitachi Tower now could be the Goldman Sachs group. In August, a Goldman Sachs-linked fund bought the next-door Chevron House

A deal for 78 Shenton Way is believed to be at an advanced stage of negotiation, with the price pegged slightly below $700 million. The buyer is said to be a property fund linked to Germany's Commerz Grundbesitz Investmentgesellschaft (CGI). CGI is the capital investment company for the open-ended fund Haus-Invest, and a deal for 78 Shenton Way, when it materialises, will mark CGI's first major property acquisition in Singapore, sources say.

All eyes in the market are also on Hitachi Tower at Collyer Quay, to see if a fresh benchmark will be set soon. The latest price being bandied about for the 999-year leasehold property is said to be around $3,000 psf of NLA, lower than the $3,200 psf and $3,300 psf discussed a few months earlier. The parties that had made offers at those pricing levels have since walked away from the negotiating table.

Industry observers suggest that a natural contender for Hitachi Tower now could be the Goldman Sachs group. In August, a Goldman Sachs-linked fund bought the next-door Chevron House (formerly known as Caltex House) for $2,780 psf, a record for an office block here. 'A higher price can be justified for Hitachi Tower because it has a superior tenure (999-year leasehold) and orientation,' a market watcher notes.

'Another important difference between these two buildings is that for Chevron House, there are rental caps in (major tenant) Chevron's lease agreement, which limits the near-term rental upside that the building's owner can achieve,' he added.

Hitachi Tower is 50:50 owned by CapitaLand and National University of Singapore. The 37-storey property has an NLA of around 280,000 square feet. Chevron House is on a site with a remaining lease of about 81 years.

Some industry observers think that it makes sense for Goldman to own two adjoining office blocks as it can then take advantage of synergies in managing them, as well as tap the possibility of redeveloping the properties in the longer term - or at least pitch that angle to potential buyers of the two properties when it wants to divest them in future.

A Goldman Sachs real estate fund also bought DBS Towers 1 and 2 on Shenton Way in November 2005 for $690 million or around $800 psf of NLA.

As for 78 Shenton Way, which CGI is in negotiations to buy, the acquisition will be based on a total NLA of 365,000 sq ft, which includes some 65,000 sq ft that the seller, a joint venture between Credit Suisse and CLSA funds, has undertaken to build for the asset. The site has a remaining lease of about 75 years.

KeyPoint at Beach Road stands on a site with a remaining lease of 68 years. It is being sold by Sable Resources, whose key shareholder is Han Chee Juan, who teamed up with a group of investors to buy the 25-storey property, formerly known as Jalan Sultan Centre, in 1996 from the former Pidemco Land.

Their acquisition price was $125 million and the group completed a $35 million refurbishment of the asset in early 2000.

Buyer Allco Reit said the assumed initial net property income yield for the first 12 months is 4.65 per cent, inclusive of the $10.5 million income support. The acquisition will be fully debt-funded with a cost of debt of about 3.6 per cent. The trust's leverage will increase from 33.2 per cent to about 46.5 per cent after the completion of the acquisition, Allco said. DTZ Debenham Tie Leung brokered KeyPoint's sale.

KeyPoint currently has an NLA of 311,892 sq ft, of which about 89.4 per cent is offices and the remaining 10.6 per cent retail space. KeyPoint also has 227 car-park lots.