Friday, September 14, 2012

Brighter prospects for strata shops and offices


by Ong Kah Seng
04:45 AM Sep 14, 2012

Strata commercial property such as shops and offices have been extremely popular in the primary market this year and are expected to sustain buyer interest, even in the sub-sale market, as attention is increasingly diverted away from residential and industrial segments.

Since the introduction of the seller's stamp duty for private residential purchases in January last year, investors have flocked into non-residential strata properties, particularly in the industrial space.

In fact, the craze for strata industrial units has resulted in price and rental escalation that have affected the affordability of industrialists who are bona fide users of such properties.

Prices of multiple-user factory space surged by 8.3 per cent in 2Q 2012 from the previous quarter, after the 7.2 per cent rise in 1Q 2012. Rentals of multiple-user factory space jumped by 4 per cent in 2Q 2012 from the previous quarter.

While strata industrial units remain attractive because their price quantum is considered the lowest among all property types, investor interest is expected to moderate amid heightened concerns about affordability to industrialists and the prospects of more Government tightening measures.

New industrial leases from the Government Land Sales programme have recently been reduced to 30 years to separate end-users from investors.

Risk-averse investors concerned about price sustainability are increasingly putting purchase decisions at bay, particularly if changes to the dynamics of industrial property mean returns cannot be easily realised.

Developer sales of commercial property are timely, especially after the decades-long hiatus.

Although strata shops and offices are pricier than strata industrial properties, they will offer opportunities to buyers with deeper pockets and those who opt to invest in very small shops and offices.

There is no single mall owner to control the tenant mix in strata malls but the free-play element can potentially allow more innovations from new retailers.

These may include retailers that are not able to gain entry into established single-owner malls that emphasise retail offering compatibility.

Minimal Government intervention is expected in the strata shop space as speculation is not expected to affect viability in general. Continued marginal upside in strata shop prices within the parameters of economic performance is expected. The interest for new strata shops can extend from developer sales to sub-sales in the months ahead, reflecting interest from buyers who had missed out on the early opportunity.

But as they purchase at higher prices, there will be limited opportunity to flip the property and the buyers are likely to be long-term investors rather than speculators.

However, long-term investors in new strata shops should critically evaluate the investment potential and this extends beyond its accessibility to include the catchment population and the profile of regular shoppers. A long-term investor for strata shops also needs to recognise the risks stemming from incompatibility in the mix of retailers as there will be no central mall operator.

Strata offices were the star performers in 1H 2012, as virtually no new projects in this segment were undertaken in the past decades.

Another important driver for buying interest in strata offices is the increasing preference among businesses to own property assets to enjoy long-term operational cost certainty.

Businesses are averse to lease renewals where rents can be raised unilaterally while relocations come with significant additional costs.

The prospects for strata offices in choice locations, particularly those in mixed-use developments with retail facilities as amenities for office users, will be favourable.

Like strata shops, speculation in strata office properties purchased from developers do not essentially affect the viability of businesses in general, which predominantly are in single-owner office buildings or older strata office buildings.

Indeed, strata offices have even better ability than strata shops to hold their own as there is no major requirement for a central owner to control the occupant or tenant mix as in the case of shopping malls.

The vibrancy of the commercial sector in Singapore, as opposed to the industrial segment where operational costs are less competitive in Asia, is also reason for end-users and investors to consider buying strata offices for operations and investments.


Ong Kah Seng is Director at R'ST Research, an independent property market research and advisory company in Singapore.


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