Prime city markets to be shielded from US rate hike: Knight Frank

20140925-bt-prime-city-markets-shielded-knight-frank-pic THE US Federal Reserve's raising of interest rates in 2015 is likely to shake up capital and property markets, but Knight Frank analysts believe that prime city markets will be somewhat shielded from their impact.

This is especially if higher rates are accompanied by a strengthening American economy or greater market optimism, they say.

Ian Loh, director and head of investment and capital markets, on Wednesday told reporters that while higher rates will narrow the spread of prime office yields over bonds and neutralise rising rents, he sees capital values of office spaces staying "relatively stable" at least for the next year or so.

Singapore office rents have been climbing up due to a supply constraint. Monthly rents for premium-grade offices shot up 6.1 per cent from the second quarter to the third to S$11.67 per square foot (psf), while Grade-A office rents rose 2.9 per cent to S$10.25 psf, according to a recent Colliers report.

And they are set to rise further until "two spurts of growth in new supply from Tanjong Pagar Centre by GuocoLand and Marina One Singapore by M+S are completed in 2016 and 2017 respectively", said Knight Frank Singapore research head Alice Tan.

Today, with government covenants having lost their shine and several major economies - the US, France, and the UK - having faced credit rating downgrades in recent years, bond yields are generally trading above their 2011-2012 lows but property prices look "re-priced and competitive".

In Asia-Pacific, the spreads of office yields over 10-year government bond yields rose as the latter stood below last year's levels, further boosting the attractiveness of office property as an asset class.

Knight Frank expects a recovery in occupier market demand to improve property yields through rental growth, it said in its inaugural Global Cities Report 2015 report released on Wednesday.

"Interest in commercial buildings is still very strong. Sellers of stock remain very tight, and realistically, any sellers right now are mainly funds, because they need to get out, rather than they find it the perfect market to get out," Mr Loh said.

In any case, if rising rates are consistent with an improving US economy, Singapore will benefit from tenant demand from strong American or international companies. Vacancies can then be filled and rents raised, and this could offset the higher cost of debt, said Nicholas Holt, Knight Frank's Asia-Pacific head of research.

Neil Brookes, Knight Frank's Asia-Pacific head of capital markets, added that "if (investors) are bullish on rental growth, they will be willing to accept the slightly lower spread between cost of debt and the yield, because they are expecting more growth over a, say, five-year term".

Most investors in Singapore office space are here for the medium to long term, not a mere one or two years, the analysts say. The Fed has also signalled that any increase in rates is going to be gentle.

The risk of higher rates has often been that as yields on alternative investments rise, low-yielding property could appear less attractive.

Currently, prime office yields stand at about 3.4 per cent in Singapore, 3-3.5 per cent in Tokyo, 4.5-5 per cent in London, and 6-6.5 per cent in Sydney.

Source: Business Times, 25 Sep 2014