Not Too Late To Cash In On Office Boom

Source : The Sunday Times, May 18, 2008

Demand and rentals likely to stay healthy as supply remains limited, say analysts

The housing market in Singapore has started to turn bearish and investors are duly retreating from residential properties and property-related stocks.

But there are other classes of properties that may be worth a look for those still seeking to profit from property investments.

Offices seem the most obvious choice. The segment is still going strong even in the current market malaise, fuelled by a persistent supply crunch and strong demand for space from expanding businesses.

Investors may fear they have missed the boat, with office prices having soared 32.6 per cent last year alone. Growth in prices and rents has also started to moderate.

However, property consultants say it may not be too late to cash in on the office boom.

Demand is likely to stay healthy in the short- to medium-term even as new supply remains limited. Only one million sq ft of new space will be completed this year, according to Corporate Locations, which helps companies lease office space.

'There is currently an excess of demand over available space,' said Mr Moray Armstrong, executive director of office services at property consultancy CB Richard Ellis, in a recent report.

'Landlords will still be able to achieve high rents on rent reviews or lease renewals, due to the absence of alternatives for occupiers.'

Property firm Colliers International also still sees 'immense potential upside' in office rents and values, noting that office values are still about 27 per cent lower than their peak in the mid-1990s.

Buoyant yields

Recently, office prices have started to flatten out with fewer transactions taking place. Rents, however, are projected to keep rising at least until 2010, when more substantial space comes onto the market.

Prices of offices inched up just 1.1 per cent in the first quarter, but rents jumped 7.3 per cent. This indicates that annual rental yields are on the rise and may climb further, property experts say.

Traditionally, yields of office space have been higher than most other types of property. In the last two years, net rental yields for offices largely ranged from 5 to 7 per cent - almost double the usual rental yield for homes, which is about 2 to 4 per cent.

The strong rental yield may also mean that investors can get away without forking out cash for the mortgage payments, said Colliers in a research paper last month.

It said the current fixed interest rate loan for commercial properties is between 4 and 4.5 per cent for the first two years, which means the rent will probably be enough to cover the mortgage instalments.

Higher yields also mean that investors in strata-titled office properties would be able to double their investment in a much shorter time than for homes, said Colliers. It projects 13 to 14 years for offices to reach that stage, compared to 18 to 29 years for homes.

Higher risks

With the greater returns from office investments also come greater risks, warns Colliers.

For one thing, it is more difficult to obtain financing, as banks generally lend only 60 to 70 per cent of the property's sale price or market value, compared to between 80 and 90 per cent for homes. And interest rates tend to be higher for office loans.

Also, buyers cannot use their Central Provident Fund savings to pay for office purchases.

Investors hoping to reap windfall gains by buying older buildings with 'collective sale potential' should also be cautious, as the process is much more difficult for office buildings compared to condos.

How to buy an office unit?

Obviously, most casual investors are unable to afford entire office buildings. What they usually do is to buy strata-titled office units, which are sold singly. But these properties are few and far between.

There are probably fewer than 350 completed office and industrial buildings in Singapore that are available for sale on a strata basis, estimated Colliers.

Most of these, especially offices, are likely to be leasehold and more than 20 years old. These include Golden Mile Complex in Beach Road and High Street Centre in North Bridge Road, both of which have leases that started in 1969.

Investors looking for newer buildings can check out Suntec City Tower, Southbank at North Bridge Road and The Central near Clarke Quay. Units sold in these buildings between last July and February averaged $2,277 per sq ft (psf), $941 psf and $1,749 psf respectively, said Colliers.

Buyers of office units must first place an option fee of 1 per cent of the property's purchase price, said Colliers. They have two weeks to decide if they want to exercise the option, by paying another 9 per cent.

After that, the buyer's lawyer will conduct checks on the property's title, tax, floor plans, tenancy schedule, and so on.

The sale is usually completed three months after the option is exercised, when the remaining 90 per cent of the price is payable.