Investing in the commercial office market does seem to be lucrative at face value. But objectively, is that really the case? Strata-titled offices – office units on individual titles on various tenures are sold to investors/occupiers – have become a popular trend in Singapore. Property investors, both local and overseas, rode the wave of investing in strata-titled offices when the Government first introduced additional buyers stamp duty (ABSD) on the 8 December 2011, and it was further ‘enhanced’ to cool the residential property market on the 12 January 2013.
With the amount of liquidity that is floating around in the market and low-interest albeit cautious environment, the ‘money’ has to look for ‘hard assets’ to invest in. Strata-titled offices seem to be an ideal choice since median office rentals have risen some 14.9% y-o-y in 2014. Although we have not seen the rentals at the pre-crisis levels now, agents have been using the seemingly high rentals to sell strata titled offices as a suggestion of the expected rentals in the eventual completion of the project.
However, as a commercial leasing agent, I have come across many small strata titled offices struggling to find tenants. By small, I mean anywhere below 5,000 sqft. Consider this: an investor buys a 500 sqft office because the premium associated with it is affordable but when it comes to leasing it out, the market for someone (or a company) who rents a 500 sqft office is so limited that these offices are often left vacant for a long time. Moreover, a tenant would be far better off renting a fully equipped serviced office in the city with full service – including a shared receptionist, conference/meeting rooms, video conference facilities, pantry for food/snacks and on top of it, fully fitted with furniture, IT capabilities and with flexible ‘lease’ terms and when it comes to upgrading, most serviced offices are happy to ‘upgrade’ tenants into bigger rooms as long as they stay within the same operator.
Furthermore, strata-titled offices or building, being diverse in its ownership usually struggle to attract top tenants as compared to single-landlord/REITS office buildings. Top tenants require large floor plates for economies of scale and well-maintained buildings. Building management has to be prompt and facade and facilities have to be kept in great condition to attract high-rent paying tenants. With different ownership in a strata-titled office building, one landlord is bound to want to outdo the other. The effects could be a diverse range of asking rent and that inevitably reduces the overall perception of the final rent that can be commanded for that building.
In recent times, investors have been offered strata-titled offices in integrated developments where there are retail components below the office building. While the retail components are retained and managed by the developer with its ability to attract good quality retail tenants, its short to middle term success of the retailers lies very much in the ability of the leasing agents to fill the strata-titled offices. The office tenants form the base to support the retailers and without that, retailers will find it very hard to keep their business going.
So while investing in strata-titled offices does look lucrative on paper, investors need to be mindful of the pitfalls associated with strata-titled offices, which in many cases are too small to be able to command the right yield as promised initially by marketing agents.