Strata office space faces stiff competition

/ The Edge Property |

May 27, 2016 10:00 AM SGT

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Competition has intensified in the strata office space. The bulk of the supply is coming from property developers and groups that purchased prime office buildings en bloc over the past three years and subsequently carved up small units for strata sales.

Examples include Prudential Tower on Cecil Street, which was purchased by a consortium led by KOP; GSH Plaza at Raffles Place by a group of investors led by GSH Corp; and Havelock2 by Guthrie GTS. The strata office units in these buildings were launched for sale over the past 1½ years.

The biggest expected roll-out of strata office space could come from assets owned by Perennial Real Estate Holdings and its investors. The company led a syndicate of investors who snapped up TripleOne Somerset on Somerset Road for $970 million in 2013. Perennial, leading another consortium of investors, swooped in on AXA Tower at 8 Shenton Way for $1.18 billion.

However, Perennial is cautious and taking its time to launch. At TripleOne Somerset, CBRE has been appointed the marketing agent for the strata office and medical suites. Private previews started last month. The 17-storey building is considered one of the biggest office and retail developments in the Orchard Road neighbourhood. It has a 99-year lease with effect from 1975, which means it has about 58 years remaining on its lease.

In the pipeline for launch are strata office units and medical suites at TripleOne Somerset

There will be a total of 462 office units with sizes from 366 to 2,045 sq ft on the upper floors. In the retail podium that occupies the first four floors of the building, there will be 31 medical suites on the third and fourth levels that will be offered for sale. The sizes of these medical suites will range from 635 to 1,765 sq ft. The retail and F&B units in the retail podium will not be offered for sale.

The office space at TripleOne Somerset is currently more than 90% occupied, with rental rates in the range of $7 psf a month, notes Galven Tan, director of investment properties at CBRE. Buyers of the strata space have the flexibility of combining units to fit their needs, he adds. The building has two wings, but only one wing of about 10,000 sq ft that fronts Somerset Road will be offered for strata sale.

TripleOne Somerset is set to undergo a $150 million asset enhancement exercise that will include a shimmery new gold cladding on the exterior of the building. The strata office units have an indicative price of about $2,800 psf, while the prices of the medical suites are not available yet.

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Interest in the strata office space at TripleOne Somerset has come mainly from business occupiers rather than investors, and these are companies involved in consumer and lifestyle goods, professionals such as accountants, medical groups and legal firms that want an Orchard Road presence, says CBRE’s Tan. “They don’t want to be subjected to rental fluctuations and prefer to buy their own office space as mortgage rates are still relatively low.”

Gathering interest Meanwhile, JLL has been appointed the marketing agent for 8 Shenton Way. Even though the 52-storey tower is 30 years old, it is still a landmark in Tanjong Pagar today. The 99-year leasehold building has 65 years left on its lease.

After strata subdivision, the building will have about 300 strata office units with sizes in the range of 1,700 to 1,900 sq ft. Expressions of interest are believed to have begun since the start of the year.

Strata office units and medical suites will be offered for sale selectively at 8 Shenton Way

Interest in the strata office units at 8 Shenton Way has come mainly from the traditional buyers of strata office space in the CBD, namely companies involved in shipping, commodity trading as well as oil and gas. Some new businesses looking at space in the building include tech companies, co-working space operators and family offices. The indicative price for the strata office units is said to range from $2,500 psf for the low floors to above $3,000 psf for the higher floors. According to agents, there are eight units per floor, and on the high floors, half the units will enjoy sea views.

“Not many strata office buildings have such views,” according to Navin Bafna, branch director of PropNex Realty, who has been specialising in strata commercial sales for the last five years. “AXA Tower has a huge advantage over the rest.”

Perennial has plans to enhance the asset at 8 Shenton Way — for instance, the main office lobby and drop-off point. A new two-storey annex block with 26,000 sq ft of medical space will be built, which will further increase the retail footprint of the building. After strata subdivision, there will be 22 medical suites with sizes ranging from 500 to 1,900 sq ft. According to sources, the medical suites could be in the range of $4,500 to $5,000 psf.

At GSH Plaza, JLL and PropNex are the joint marketing agents for the strata office units. The building is undergoing a major retrofitting exercise that is targeted for completion late this year. There are about 250 strata office units from the third to 28th storeys, and 21 retail and F&B units on the first two levels of the building. It has a 99-year lease from 1989, with 72 years left on its lease.

Over the past 12 months, strata office units at GSH Plaza that have been sold ranged from 484 sq ft to an entire floor of 15,662 sq ft, with absolute prices from $1.57 million to $44.64 million. In terms of price psf, the office units sold were in the range of $2,833 to $3,503 psf.

The owners of GSH Plaza are also exploring a leasing strategy and have appointed JLL as the marketing agent.

Transactions plummet Strata office transactions ranged from 40 to 80 units per quarter last year, according to Knight Frank. However, the number of transactions has dropped to just 37 as at end-1Q2016. Data from Colliers International likewise demonstrates a downward trend. Based on caveats lodged and downloaded on May 25, the number of strata office sales in the Downtown Core has fallen 44% y-o-y from 145 units in 2014 to 81 last year.

Most of the buyers who have fallen by the wayside are investors who had to re-evaluate their buying decisions against their ability to borrow, given the tightened limits imposed by the total debt servicing ratio framework, says Tang Wei Leng, managing director of Colliers International in Singapore.

The new strata office buildings such as Oxley Tower, Crown at Robinson, Robinson Square and SBF Center are attracting a different segment. “These buildings cater for the needs of start-ups, e-commerce trades or trading companies that might not need big offices, as well as occupiers who are more sensitive to rent fluctuations,” says Tang.

However, these new developments, which were launched in 2011 to 2013 following the spate of property cooling measures, had attracted a fresh crop of investors who had switched from buying residential to strata commercial units. A distressed sale has just emerged at the 99-year leasehold SBF Center on Robinson Road. The building is expected to obtain its Temporary Occupation Permit in the coming months. However, a 624 sq ft office unit on the 21st floor changed hands in a subsale for $1.72 million ($2,754 psf) in April. The unit was first purchased for $1.97 million ($3,154 psf), according to a caveat on March 13. That translates to a price drop of $400 psf (12.7%) in three years.

“It’s a reflection of an increasingly challenging business environment and not the building quality or the unit,” says PropNex’s Bafna.

Developed by Far East Organization, SBF Center is a 31-storey complex with strata office space, medical suites and F&B units. The building is substantially sold.

Located two doors away is Robinson Square, which was developed by Oxley Holdings. The 20-storey mixed-use development with strata offices on the upper levels and three retail units on the ground floor was completed in early 2015. The development was fully sold ahead of completion, with freehold strata office units fetching prices of $2,001 to $3,029 psf and strata retail units from $3,000 to $5,000 psf. Typical office units are from 1,173 to 1,184 sq ft. Retail units range from 183 to 1,367 sq ft.

One of the retail units at Robinson Square has been leased to a florist, while another unit is occupied by a dental clinic. A handful of the 32 office units have been leased to date, according to Bafna. He brokered two of the units on the 14th level, which were leased to a Korean conglomerate. The rental rate achieved for the two units was $7.75 psf a month, he says.

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Meanwhile, a pole dance studio has taken up a 1,173 sq ft unit on the 10th floor. The unit has a 5m ceiling height. “I was at the office building for a viewing recently and wondering why there were all these ladies coming down in [skimpy outfits],” recounts Bafna. However, asking rents at Robinson Square have weakened as investors try to secure tenants for their units. For instance, a 1,176 sq ft unit was recently listed with an asking rent of $4,939, or $4.20 psf, a month. “Anything is possible in today’s market,” Bafna says, adding that those who cannot find a tenant will also be looking to sell their units.

Older strata buildings bear the brunt Bearing the brunt of slowing demand amid increased supply are older strata office buildings. Given the fragmented ownership, it is harder for these strata office building owners to undertake massive asset enhancement exercises similar to those by the bigger property groups, notes Clemence Lee, manager of capital markets at JLL. Therefore, they could see further pressure on their rents and prices.

In Tanjong Pagar is International Plaza, a 50-storey office building that was completed in 1976. However, the building was upgraded several years ago. Even though the 99-year leasehold building is 40 years old, PropNex’s Bafna considers it the barometer of the strata office market in the CBD. He brokered the sale of three units in the building over the past two months and has seen how prices have corrected over the past two years.

One of the units Bafna sold recently was a 1,453 sq ft unit on the 20th floor of International Plaza, which changed hands for $2.5 million ($1,720 psf), according to a caveat in April. Two years ago, a 1,884 sq ft unit on the 27th floor was sold for $4 million ($2,125 psf), says Bafna. He sees the recent price discount of $400 psf as “a good deal”, as units above the 18th floor offer views of Marina Bay or Tanjong Pagar.

Traditionally, the old strata office buildings in the CBD, such as International Plaza, Shenton House and Maxwell House, have been occupied by shipping, commodities traders and oil companies. And these have predominantly been Indian businessmen, says Bafna. “Companies in these sectors have been hit, as bank credit lines have tightened and fortunes in the commodities and oil sectors worsened,” he notes.

This is illustrated by the fortunes of commodity trading company Pars Ram Brothers, which went bankrupt last December. The company was founded in 1937, and the business had passed into the hands of the second generation. Last January, liquidators put its 603 sq ft strata office space on the 24th floor of Tong Eng Building for sale. The sale price was $1.56 million ($2,588 psf), according to a caveat lodged in January.

The family home of Pars Ram’s director and major shareholder, Kirpa Ram Sharma, was also put up for mortgagee sale by DTZ at end-March. The bungalow on Branksome Road sits on a freehold land area of 13,189 sq ft and had an opening price of $16 million, but was withdrawn as offers fell below the opening price. The property is now available for sale by private treaty.

A unit at High Street Centre was put up for receiver’s sale by Colliers in February and sold a month later for $1,350 psf

Another distressed sale was seen recently at High Street Centre. A 786 sq ft unit on the 15th floor was put up for receiver’s sale by Colliers at its February auction. The unit had an opening price of $1.28 million, but was withdrawn. It was subsequently sold in March for $1.06 million ($1,350 psf), according to a caveat lodged then.

“The unit commands an unobstructed view of the Singapore River, so $1,350 psf is a very attractive price,” says Bafna. “Most of the asking prices for units at High Street Centre are $1,600 to $1,800 psf.”

There are several strata units at High Street Centre that are available for sale by private treaty, with Knight Frank as the marketing agent. These units have sizes ranging from 1,550 to 3,433 sq ft. The asking price is $1,800 psf. “Some of these sellers at High Street Centre own multiple units, and they want to cash out,” says Mary Sai, executive director of investment and capital markets at Knight Frank. “Others are looking to downsize.”

Older strata office buildings, such as GB Building (pictured) on Cecil Street, are facing competition from newer strata office

offerings in the vicinity, such as SBF Center and Oxley Tower

Sai is also marketing a half-floor, 5,425 sq ft unit at GB Building, a 99-year leasehold office building at the corner of Cecil Street. The building has 65 years left on its lease. There have not been any transactions at GB Building since 2014, when a 16,060 sq ft unit on the 20th floor was sold for $31.7 million ($1,973 psf), based on caveats lodged. The unit that Sai is marketing is seeing a reasonable amount of interest at $1,900 psf, as the office is fully fitted and has “decent passing rents”, she says.

Behind GB Building is Oxley Tower, a strata office tower that is currently under construction. Adjacent to GB Building is the upcoming SBF Center, which has frontage along Cecil Street and Robinson Road. “Older strata office buildings will definitely be affected by the new strata office buildings in their vicinity,” says Colliers’ Tang.

The office market is expected to see 4.7 million sq ft of new supply in the core CBD of Raffles Place and Tanjong Pagar over the next two years. The targeted tenants in the new Grade A office buildings are likely to be MNCs and established companies — a completely different market segment from the small- and medium- sized enterprises that gravitate towards the strata office space. However, the new supply is still likely to dampen sentiment and put further pressure on rents, concedes Tang.

Knight Frank’s Sai agrees. “The fear among potential buyers is the looming supply of office space and the fact that rents have already fallen over the past six to eight months,” she says.

This article appeared in the City & Country, Issue 730 (May 30, 2016) of The Edge Singapore.

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