ASIAVIEW: Singapore’s silver lining

BlackRock Real Estate's twin tower Asia Square office development in Singapore has always commanded headlines and it was no different last month when the New York-based asset management behemoth announced it had agreed to sell the first of the towers to sovereign wealth fund Qatar Investment Authority (QIA).

To recap: Asia Square is considered interesting because of its relevance for its fund, its firm as well as the wider Singapore and Asian office markets. The development sparked controversy when MGPA, the private equity real estate firm, now part of BlackRock, purchased the land to build the towers from the Singaporean government back in 2008. The firm had raised $3.9 billion in 2008 for what was supposed to be a pan-regional, third opportunity fund, but opted to use S$2.97 billion ($2.21 billion; €1.95 billion) of its corpus to buy the land for this one development. Cue the global financial crisis and challenging supply-demand occupational dynamics in the Singapore office market and the naysayers have perched on the side lines ever since.

Since it was brought to the market last year suitors for the first of the two towers have been and gone, including Singaporean property company CapitaLand, Singaporean asset manager ARA Asset Management and Norway's state investment fund manager, Norges Bank Investment Management. The lack of a transaction fuelled further criticism of BlackRock's choice to engage so heavily with one project in the city-state. So when a deal was finally inked with the QIA last month, it was met with a mixture of surprise, relief and, naturally, a heap of scrutiny.

One major area of focus was pricing. BlackRock and QIA settled on a price of S$3.4 billion for Asia Square Tower 1, reflecting a price per square foot of S$2,720. That was way off the S$3,638 per square foot hoped for in 2014, when sale plans were first shared with Fund III investors, and even the S$3,200 sought when the 1.2 million square foot building was brought to the market last year. The property's occupancy has since slipped, from 90 percent then to 83 percent today, and growing rival supply has pushed rents downwards, adversely impacting capital values. Its sale is expected to generate a high single digit internal rate of return (IRR). While not the high double-digit IRR hoped for when Fund III was closed to investors, the equity multiple will be closer to target.

Cause for finger-wagging? Despite the portfolio concentration issue, BlackRock supporters would urge consideration of the fund's vintage and the firm's performance relative to its peer group. How many 2008 funds have returned all their investors' capital and made a profit too? The answer is not many.

A second area the naysayers focused on was asset management. BlackRock has been awarded a new asset management contract for Asia Square by QIA, leading some commentators to suspect the firm of prioritizing bidders that would retain it as manager and enabling it to keep a significant stream of management fees. While BlackRock declined to comment on its continued asset management of Asia Square, PERE dug deeper into the matter and was told by sources, that, in fact, BlackRock was asked by QIA to provide this service, not the other way around. Further, and crucially, the fees being charged have been discounted by as much as one-third. QIA has been given right of first refusal to acquire Asia Square Tower II when it hits the market. But again, to tidy up a misconception, BlackRock has not agreed a second, conditional asset management arrangement in the case that QIA does take up this right. Interestingly, the right of first refusal for QIA was questioned too as arguably not being in investors' best interests. The counterargument here is that it is better to guard against the two towers competing with one another for tenants in the case of different ownerships.

One final point from PERE's excavations: Fund III has a 25-strong advisory council made up from investors in the fund. Though there were some abstentions, there was no opposition to BlackRock's proposal to sell Asia Square Tower I to the QIA. While PERE has heard from certain Fund III investors that remain unconvinced this was the best outcome, they will have made money from a challenging fund vintage and BlackRock will not prosper from continued asset management. Most important: if they really did not like the deal, they had a forum to make an issue of it and chose not to. Looks, then, like they faced the facts.

Additional reporting by Arshiya Khullar.