Tepid activity in strata commercial, shophouses seen for H2 2016

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Tepid activity in strata commercial, shophouses seen for H2 2016

Strata office and shophouse transactions decline in H1, but strata retail deals enjoy a lift

By Lynette Khoo

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@LynetteKhooBT

Sep 1, 2016


ACTIVITY in the strata office market and shophouse segments remained muted in the first half of this year, as seen in a decline in the number and value of caveats lodged. But strata retail transactions enjoyed a lift from the launch of Centrium Square.

This divergence in trend is nothing but a blip, Knight Frank observed, noting that buyers' sentiment in the strata retail space has not changed amid waning occupancies and a supply deluge.

Caveats analysis by the consultancy showed that strata office transactions fell to 115 deals worth about S$400 million in the first half of this year, compared to 119 deals worth S$501 million in the second half of last year. Shophouse transactions also slipped to 35 deals worth about S$227 million, down from 47 deals worth some S$300 million. During the same period, however, strata retail transactions rose to 124 deals worth S$240 million, up from 107 deals worth close to S$200 million.

The 20 per cent drop in strata office transaction value in the first half of this year from H2 2015 was mainly due to lower transacted values for new sales and resales, despite a jump in new sale volumes buoyed by the launch of Centrium Square. In the first half, the former Serangoon Plaza accounted for 90.1 per cent of the total caveats lodged for new sale strata offices that are freehold.

Companies continue to be top purchasers of office units, making up 80.3 per cent of the total office transactions in the first half, followed by Singapore citizens (13.7 per cent) and foreigners (6 per cent). A rise in interest for larger floor plates was seen, with the proportion of office transactions above S$2 million at 33.1 per cent in the first half this year, up from 28.5 per cent in H2 2015.

But both strata office and retail markets continue to face headwinds from softening economic and business outlook and rising competition from landlords.

The rising popularity of alternatives such as co-working spaces that appeal to tenants with smaller office needs and a significant pipeline of office supply will also cannibalise some demand for strata office purchases, Knight Frank noted.

Still, all is not lost for the strata commercial market.

"As more companies look towards cost sustainability on a long-term basis, however, some may consider purchasing office units for their own use," Knight Frank head of consultancy and research Alice Tan said.

CBRE Research head of Singapore and South-east Asia Desmond Sim noted that while the total debt servicing ratio (TDSR) since June 2013 has curbed Singaporeans' investment in the commercial space, it does not spell the end for the strata market, especially for projects targeting end-users.

"We have seen some positive signs even in the Woodlands Regional Centre as in the case of Woods Square, which sold half of the released units," he said. This shows that if the price quantum is palatable for companies' balance sheet, they will bite.

Contributing to a near-20 per cent rise in strata retail transaction value in H1 2016 from H2 2015 was a single-buyer transaction at Centrium Square. A total of 32 caveats with a total transaction value of S$70.1 million were understood to be lodged by Canali Logistics Pte Ltd, the Singapore-incorporated vehicle of Mohammed Saiful Alam, who controls Bangladeshi conglomerate S Alam Group.

Canali is reported to have snapped up all 49 retail units at Centrium Square in Little India for S$135 million, which works out to S$4,967 per square foot (psf) for the freehold strata area of 27,179 sq ft on the first two levels. The project is being developed by Feature Development, a unit of Tong Eng Group.

The high price for these retail units at Centrium Square also drove up the average price for new strata retail units in the freehold segment to S$3,741 psf in H1 2016, 32.6 per cent higher than in H2 2015.

With no signs of a turnaround in buyers' sentiment, Knight Frank is projecting transaction volumes for strata office and retail space to remain in the region of 110-150 units and 100-120 units respectively, with shophouse transactions hovering around 30-40 units in the second half of 2016.

Savills Singapore research head Alan Cheong is also expecting transaction volumes for the rest of this year to stay muted against the backdrop of a lacklustre economy when end-users may defer their purchase decisions.

But current low yields from strata commercial units may not be a strong deterrent for end-users when they consider the outgoings that come with renting a space and the risk of future rental hikes, Mr Cheong said. For investors, however, they would have to mindful that the final yield for a newly completed development will differ from the hypothetical yield at the time of off-plan sales.

"For prices (of strata units), they are very dependent on the spawning of new sales in any particular quarter and if there is a lack of new product offerings, prices will hover at resale price levels, which is usually a notch down from new sale prices," he said. "At the resale level, I would expect prices to be rather flat because there is still no pressure on sellers to offload quickly."