http://www.straitstimes.com/Invest/S...ry_549333.html

Jul 4, 2010

property

Rising interest in small office units

Hopes of recovery in commercial unit sector turning it into alternative investment

By Joyce Teo


Investing in a condominium unit may be popular here, but some buyers are opting for a very different part of the property market.

They have turned to the office sector to pick up strata-titled office units as an alternative form of investment, as hopes of a recovery in the office market grow this year.

These strata offices are units in an office building that have been sold piecemeal unlike most office blocks, which are wholly owned by an investor or developer.

Indeed, the strata office sector was the only commercial unit sector that staged an improvement in sales activity in the first half of this year, compared with the second half of last year, said Knight Frank.

Its latest data showed that 163 strata offices changed hands in the first six months of this year, which was 16 per cent more than in the previous six-month period.

The value of these deals reached $368 million, up 73 per cent from the second half of last year.

Strata offices priced from $1 million to less than $2 million attracted the largest group of buyers at 59 deals in the first half, it said.

Buyers also like strata offices priced from $500,000 to less than $1 million. There were 44 deals in this price band in the first half.

For instance, caveats show that a 441 sq ft unit at the 999-year leasehold Peninsula Plaza went for $663,000 or $1,502 per sq ft in late April.

Knight Frank's executive director, auctions (commercial), Ms Mary Sai, said the volume improved from the low numbers registered last year when sales slowed substantially owing to a lacklustre office market.

Said DTZ's senior director for investment advisory services & auction, Mr Shaun Poh: 'We see more people looking at strata offices for investment. The commercial market has gone down quite substantially so people are looking at a recovery.'

Stronger signs of a sustained economic recovery this year, including an improved business climate, are supporting the office market, said Ms Sai.

Experts said prices of strata offices have generally risen and moved ahead of rents.

'Yields are low now at 3 per cent, but investors are buying now in anticipation of higher yields of 4, 5 per cent,' said Mr Poh.

Owner-occupiers also continue to buy strata units for their own use as they know that rents will rise in the future, he added.

Experts said office rents are starting to turn around, though a quick recovery is not in sight yet due to ample upcoming supply.

DTZ data showed that office rents bottomed in the second quarter, after falling 50 to 60 per cent from the peak in the third quarter of 2008.

Strata offices can be found in buildings such as Suntec City, Peninsula Plaza, The Central, International Plaza and Parkway Parade.

Cushman & Wakefield managing director Donald Han said renting out an office unit can be less work than renting out a home.

Typically, you rent out a base shell and the office tenant will renovate it. At the end of the lease, the tenant will take down the renovations and return it in its original condition, he said.

In the office market, you deal mostly with firms, instead of individual tenants.

And, unlike the typical two-year lease in the private homes market, the minimum office lease is three years, Mr Han added.

However, the strata office market has a much smaller pool of buyers than the residential market and sellers have fewer choices, he said.

Indeed, said Ms Sai: 'Some people thinking of an alternative investment to residential property may be in for a shock when they turn to the office market as prices are not that low and there is limited supply.'

For a 99-year leasehold office unit, buyers will need to be prepared to pay at least $1 million, she said.

They also have to pay the 7 per cent goods and services tax, she added.

Furthermore, they will typically get a smaller loan relative to a property's value, than for homes.

For the rest of the year, sales activity for strata office units is likely to increase moderately as investor sentiment for strata office units improves, said Ms Sai.

Potential buyers of strata offices are likely to continue to remain less sensitive to the tenure of strata offices. About two-thirds of strata offices transacted in the past year were 99-year leasehold ones.

Ms Sai said this trend is likely to continue, given limited supply, lower capital outlay and attractive yields of leasehold strata offices.

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