Friday, July 13, 2012

Developers take innovative approach to office supply

Business Times: Fri, Jul 13

DEVELOPERS are thinking of more "innovative" ways to deal with the growing supply of prime office space by redeveloping existing office buildings for other uses, said Craig Ward, Savills Singapore senior director of regional capital markets at the Redas (Real Estate Developers' Association of Singapore) Property Prospects Update Seminar 2012 yesterday.

Notably, office space in Singapore's central business district (CBD) with a net lettable area (NLA) of around 1.4 million square feet is set to be removed for redevelopment into residential and commercial type projects over the next year or so, according to data compiled by Savills Research & Consultancy.

Said Mr Ward: "Singapore is a very entrepreneurial market. We find that there are a lot of new investors here that are looking at opportunities and looking at buildings on an alternative basis . . . And what we are seeing are developers adopting a change-of-use perspective, as well as bringing down lot sizes to cater to a larger investable (audience)."

And this trend is likely to continue especially amid a potential office supply glut situation in the CBD, he said.

Already, developers have been up to their necks with the conversions of older office buildings into new strata projects comprising retail and residential offerings - such as Oxley Tower, Robinson Square and Eon Shenton - on the back of hot demand from buyers.

For instance, retail units at the freehold strata development Oxley Tower along Robinson Road saw brisk take-up for all its shop and cafe units (with more than one interested buyer per unit) at its launch despite their hefty price tags.

Most of the units were also smallish in nature (with shop units starting from 118 sq ft at Oxley Tower), as developers try to keep lump sum prices affordable while achieving higher per square foot prices of about $3,000 psf or more.

All that said, the quantum of existing office space that will be removed for redevelopment still remains somewhat negligible from a bigger picture perspective.

New supply and increasing secondary stock in the CBD Grade A space are still a concern going forward, particularly beyond a two-year horizon as sizeable tranches that are substantially yet to be pre-leased are set to hit the market sometime in 2015 to 2016.

"What is a little nerve wracking is that we don't have the same amount of pre-lease as before, and it would be difficult in this environment to get tenants to pre-lease," Mr Ward warned.

Not surprisingly, vacancy rates have also crept up over the past year or so, with 1Q2012 numbers coming in at 6.5 per cent, almost twice that of the same period a year back (3.6 per cent), though Mr Ward was quick to assure that the numbers are not all that worrying yet.

"Vacancy rates around 2002 to 2005 were somewhere around 20 per cent . . . So we've got a long way to go before we have any real concerns on vacancy levels," he said.

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