Analysts say commercial properties to remain hot

AMPLE LIQUIDITY::Led by purchases by cash-rich life insurance firms, commercial property transactions nearly doubled sequentially last quarter to hit NT$54.5 billion

By Crystal Hsu  /  Staff Reporter

Thu, Oct 06, 2011 - Page 11

The commercial property market is likely to remain robust this quarter after transactions hit a four-year high last quarter, thanks to abundant liquidity which bolstered prices but kept rental yields lower than borrowing costs, analysts said yesterday.

Commercial property transactions totaled NT$54.5 billion (US$1.78 billion) during the July-to-September period, the highest since the final quarter of 2007, according to a report by Colliers International, a global real-estate service provider.

That figure was nearly double the amount in the second quarter and was up 158 percent from a year earlier, as major domestic life insurance companies raised their real-estate holdings to park their idle funds.

“The trend is likely to extend into this quarter and next year as insurers remain flush with cash and heightened investment risks abroad limit options,” Andrew Liu (劉學龍), managing director at Colliers International, said by telephone.

Financial institutions contributed NT$25.3 billion to commercial property transactions last quarter, accounting for 46.49 percent, the report said.

Cathay Life Insurance Co (國泰人壽), the nation’s largest life insurance company by market share, bought four office buildings for NT$21.54 billion and Fubon Life Insurance Co (富邦人壽), the second-largest insurer, made two purchases worth NT$3.05 billion.

Meanwhile, Cathay Life’s record offer of NT$9.6 billion for a 62 percent stake in an office building on Dunhua S Road in Taipei — the underlying asset for real-estate asset trust (REAT) Shin Kong Life Insurance Co (新光人壽) issued in 2005 — dragged the rental yield to 1.81 percent, lower than the 1.875 percent required of real-estate investments by life insurers.

To curb property speculation, the Financial Supervisory Commission requires that real-estate investments by life insurers must generate annual rental returns on a par with interest rates for two-year postal time savings — currently at 1.375 percent — plus 50 basis points.

Cathay Life has said it would be utilizing the office space itself after existing leases expire, freeing it from the rental yield requirements.

Still, negative returns, unhealthy for the property market, are likely to deepen, as commercial property prices climb higher owing to limited supply and solid demand.

Interest rates for commercial property loans stand at 2.5 to 3 percent, while rental returns are expected to average 2 percent this year, said Billy Yen (顏炳立), general manager of DTZ, another international property consultancy.

Almost all life insurers are aiming to strengthen their real-estate portfolio, but few have made significant progress given the lack of suitable products, Yen said.

“The backdrop makes a price drop unlikely in the foreseeable future,” Yen told reporters.

The market will in this quarter see two more auctions of real-estate-backed securities, in addition to a separate auction for an office building on Dunhua S Road owned by Prince Motors Co (太子汽車), which was originally sold in July before the deal fell through because of factors widely attributed to overpricing.