Hi Boon,
It is true that cap rate consists of two aspects - growth and risk. I have been focusing on the risk aspect of cap rate. However, if all other factors remain the same, the rise in interest rates will affect cap rates.
If we are to argue that the growth potential will rise in tandem to offset discount rate hike (increase in risk free rate) for office ppty, i truly doubt so. The CBD area will have 3 main buildings TOPing in 2016 - GuocoTower, capita green and Robinson Suites. There are 6 other smaller office complexes completing, thus an office supply rise is imminent. Similarly, the east side of Singapore has more offices spaces sprouting out, Paya Lebar and JE will have two completed office complexes by 2015 each. Doubt EDB is so good to attract enough companies to set up offices so that office rental rates will grow at 7% YoY.
I have similar views for retail component too with so many retail malls appearing. In fact some mrt places outside central region has 2-3 malls in the same area. I don't find this sustainable and something has to give soon.
It is true that cap rate consists of two aspects - growth and risk. I have been focusing on the risk aspect of cap rate. However, if all other factors remain the same, the rise in interest rates will affect cap rates.
If we are to argue that the growth potential will rise in tandem to offset discount rate hike (increase in risk free rate) for office ppty, i truly doubt so. The CBD area will have 3 main buildings TOPing in 2016 - GuocoTower, capita green and Robinson Suites. There are 6 other smaller office complexes completing, thus an office supply rise is imminent. Similarly, the east side of Singapore has more offices spaces sprouting out, Paya Lebar and JE will have two completed office complexes by 2015 each. Doubt EDB is so good to attract enough companies to set up offices so that office rental rates will grow at 7% YoY.
I have similar views for retail component too with so many retail malls appearing. In fact some mrt places outside central region has 2-3 malls in the same area. I don't find this sustainable and something has to give soon.