City&Country: Offshore-- Investing in Singapore commercial property

While the repercussions of the Singapore government’s latest set of anti-speculation measures in the residential sector are still unfolding, some of the savvier investors — and those with deeper pockets — have already turned to alternative investments. A clear favourite among them is the commercial sector, in particular strata-titled office space, shop units, including HDB shops, and conservation shophouses, says Mary Sai, head of commercial resale at Knight Frank Singapore.
This is borne out by the auction results for the Hungry Ghost Month from Aug 10 to Sept 7, where only three properties were sold under the hammer, and none of them were residential. The properties comprised a pair of shophouses at Dunlop Street in Little India that was sold at Knight Frank’s property auction for S$4.04 million (RM9.43 million); an HDB shop unit in Bishan that saw intense bidding at the DTZ auction and was sold for S$910,000; and a strata factory unit at Toh Guan Centre in Jurong that went for S$280,000.

“There’s certainly a lot of activity in commercial property,” notes Norman Ho, a partner in law firm Rodyk & Davidson LLP’s real estate practice group, who acts on behalf of owners and investors in all sectors of the real estate market. “Just this past week, I’ve done four commercial deals,” he adds. These deals involved a shophouse in the Tanjong Pagar area and entire floors in Grade-A strata-titled office towers like Springleaf Tower on Anson Road and Suntec City in Marina Centre.

In such prime Grade-A office buildings, transactions of strata-titled office space generally involve whole floors and cost tens of millions of dollars. At Suntec City Tower 1, an entire floor on the 23rd level changed hands for close to S$25 million, or S$2,130 psf, in August, according to a caveat lodged with Singapore’s Urban Redevelopment Authority (URA). In February, the whole office space on the 23rd level of the 37-storey Springleaf Tower was sold for S$14.38 million (S$1,339 psf). In August, Ho Bee Investments sold four floors of office space totalling 52,413 sq ft at Samsung Hub on Cross Street for over S$111.4 million (S$2,125 psf).

Interest in commercial properties will continue to be strong as investors seek returns that are higher than the less-than-1% fixed deposit rates offered by banks, according to Colliers International’s deputy managing director of agency and business services, Grace Ng. “However, only buyers who are conversant in commercial property will look into this class of investment,” she says.

And, while the Ordinary Account of the Central Provident Fund can be utilised to pay part of the down payment and monthly instalment for residential property, it cannot be dipped into to fund the purchase of commercial property. What’s more, besides the 30% down payment required, if the seller is a GST-registered company, the buyer has to stump up another 7% GST and 3% stamp duty, bringing the total cash payment to 40%. “Most first-time buyers baulk when they hear this,” says Ng.

What can you get for under S$3 million?
Mom-and-pop investors generally jump in at prices from S$1 million to S$3 million, notes Shaun Poh, senior director of investment advisory services at DTZ. “When it comes to residential [property], at this price range, one is spoilt for choice,” he says. “But, when it comes to starta-titled office space, there’s limited investment opportunities in this price bracket.” Investors in this segment tend to zoom in on well-located older commercial buildings. In the CBD area, for instance, are International Plaza on Anson Road next to the Tanjong Pagar MRT station, Peninsula Plaza near the City Hall MRT station and The Plaza at Beach Road.

The 34-year-old 99-year leasehold International Plaza, which underwent a S$15 million makeover three years ago, is a hot favourite among investors in the under-S$3 million price band, with at least four units changing hands in August. Three of the transactions comprised a 936 sq ft, 19th-floor unit going for S$1.25 million (S$1,335 psf), a similar-sized unit on the 28th floor selling for over S$1.4 million (S$1,500 psf) and a 2,357 sq ft, 16th-floor unit fetching S$3.34 million (S$1,416 psf).

Shop and office units at People’s Park Centre at Upper Cross Road and People’s Park Complex off Eu Tong Sen Street in Chinatown also appeal to small investors and business-occupiers because of their affordable quantum prices. In August, for instance, a third-floor, 368 sq ft shop unit at People’s Park Centre changed hands for S$560,000 (S$1,445 psf) while a 13th floor, 958 sq ft office unit went for S$870,000 (S$908 psf). At People’s Park Complex, a first-floor, 452 sq ft shop unit was sold for S$1.7 million (S$3,760 psf) while a 517 sq ft, fifth-floor unit fetched S$403,000 (S$780 psf) in August.

It’s very rare these days for new purpose-built commercial buildings in the CBD or Chinatown neighbourhood to have strata-titled office space for sale, particularly units of 1,000 sq ft or less. Hence the investment appeal of Far East Organization’s The Central at Clarke Quay, which offers a purpose-built, large-scale commercial development with a mix of small strata-titled SOHO and office suites. With typical SOHO units at 635 sq ft and “new-age” office suites measuring 646 and 883 sq ft, the quantum price is affordable for business-occupiers and investors, according to property consultants. Launched for sale in 2004 and completed three years later, the project also features a shopping mall and an underground link to the Clarke Quay MRT station.

Year-to-date, at least eight units at The Central have changed hands at prices above S$2,000 psf, with the highest achieved in April — S$2,209 psf, or S$2.66 million, for a 20th-floor, 1,206 sq ft unit. A Hong Kong investor was said to have purchased 16 SOHO units in a deal brokered by Savills in April, while the most recent transaction of a SOHO unit was in August, when a 635 sq ft unit was sold for close to S$1.1 million (S$1,730 psf).

Meanwhile, an 872 sq ft, 19th-floor office suite in the development will be put up for auction by Colliers International on Sept 22. According to market sources, the indicative price should be around S$1.7 million (S$1,950 psf). The most recent transaction of an office unit on the same level was in July, when an 883 sq ft unit was sold for S$1.74 million (S$1,971 psf). Such units are already fetching S$5 psf in terms of monthly rental rates, with owners looking at rental upside, with rents going up to S$7 psf, notes Colliers’ Ng.

Shortage of office space with recovery
“There’s a shortage of good-quality, strata-titled office space,” notes DTZ’s Poh. With the office sector on a recovery path, rental rates are picking up and capital values are on an upward trend. Cognisant of the demand for a new generation of strata-titled commercial space, some developers are looking at providing more of such space in their new apartment projects in the CBD and the city fringes, which Poh says is “a new trend”.

For instance, listed conglomerate United Industrial Corp (UIC) announced at end-August that it had paid a development charge of S$160.1 million to the URA for the proposed redevelopment of UIC Building into a mixed-use development with a 60:40 residential-to-commercial ratio and a total gross floor area (GFA) of 926,589 sq ft.

Meanwhile, according to market sources, the consortium that purchased Marina House at 70 Shenton Way for S$148 million in April is also considering expanding the commercial space in its new mixed-use development. The original plan was for a 42-storey luxury residential tower with commercial space on the ground floor. The land area of the existing 99-year leasehold development is 19,736 sq ft, with total GFA estimated at close to 200,000 sq ft. According to sources, office space could now make up around 30% of total space in the new development, and this space could be carved up into small strata-titled units for sale.

“There is definitely demand for new, Grade A small offices, but there’s just very little new supply coming through,” says Poh. “Investors are looking for new products and some developers are looking at catering to that demand.”

In the CBD, of the 6.4 million sq ft of Grade-A office space coming on stream over the next five years, 94% have floor plates of 20,000 sq ft or more, according to Chris Archibold, head of markets at Jones Lang LaSalle (JLL), who was speaking at the Singapore Bounce breakfast talk on Sept 9. Demand for large floor plates is driven by the financial services industry, representing 60% of occupiers of such space. However, Archibold said there was also “a very big demand for small floor plate buildings”.

Grade-A CBD office rents saw a 2.6% increase in 2Q2010 to an average of S$7.95 psf a month, noted Archibold, who expects a significant increase in 3Q2010.

A rare opportunity with conservation shophouses
Conservation shophouses also offer a rare purchasing opportunity, with the best time to enter, in some areas, possibly in the midst of a renewal, says Knight Frank’s Sai. Take, for instance, Stanley Street in the CBD, where two conservation shophouses have been put on the market for sale by private treaty.

One, a four-storey intermediate unit, will be sold with vacant possession. The top two floors could be leased out as office space, with rental rates in the S$3.50 to S$3.80 psf range. The ground floor could fetch around S$7 to S$8 psf if leased to an F&B outlet, or the space could alternatively house a retail store or gallery, notes Sai, who is marketing a property along the street. This will be the third time the property is put on the market since a year ago — it was sold for S$3.5 million last December and in May, changed hands again for S$4.38 million. The indicative price for the unit is S$5.4 million inclusive of GST.

The other property, several doors down, is a three-storey shophouse with a total land area of 1,532 sq ft and floor area of 3,700 sq ft. The indicative price is said to be around S$5.5 million. The freehold unit is fully tenanted at S$11,500 a month, working out to a rental yield of 2.5%.

Sai believes the area will get a new lease of life with the completion of Far East Organization’s 312-unit The Clift at McCallum Street early next year, which will bring new residents. Other new residential projects, such as the recently completed Lumiere in Mistri Road, and upcoming ones like the redevelopment of VTB Building and Chow House into residential towers along Robinson Road, will also do much to rejuvenate the area.

Meanwhile, Knight Frank is also marketing a three-storey shophouse on Keong Saik Road with a freehold land area of 1,271 sq ft. The unit is fully tenanted at a monthly rental of S$10,500. The indicative price on the property is said to be S$3.8 million, which means a gross rental yield of around 3.3%.

At Bali Lane in the Arab Street area, a two-storey shophouse was snapped up in August for S$1.8 million. The 999-year leasehold property has a site area of 720 sq ft and a floor area of 1,400 sq ft. Generally, such shophouses tend to find buyers quickly, owing to their quantum price and location, notes Sai.

Investing in shop units
HDB shop units tend to range from S$800,000 to S$1.5 million on average, with private freehold or conservation shophouses asking for more than S$2 million. Yields tend to be around 5% to 6% for leasehold and 3% to 4% for freehold properties, says Colliers’ Ng.

Some shop units, though, are rare in their availability. For instance, at the freehold Holland Shopping Centre in Holland Village, two units are up for sale via private treaty — a 290 sq ft unit with an indicative price of S$1.15 million and a 279 sq ft unit indicating S$1.1 million. There are also two adjoining shop units on the second level at High Street Plaza that will be put up for auction sale by Colliers on Sept 22. The 999-year leasehold units have an indicative price of S$1.1 million. Keen interest has been recorded from investors and business-occupiers looking at using the space for offices.

Property investors have traditionally preferred residential markets, because “it’s easier to understand, unlike commercial property, which is more complicated”, says Ng.

“Some shopping centres may be old and the trade mix haphazard,” Ng explains. “This is especially so for strata-titled properties. Hence, selecting the right unit with the right position is of paramount importance.” Pricing can also vary widely from floor to floor, and depending on the different facing or position of the units on the same floor. For residential units, psf prices do not have such sharp variations, adds Ng.

When it comes to getting a mortgage, there isn’t a significant difference between the terms for commercial and residential property financing, owing to the competitive nature of the market place, says Koh Ching Ching, head of group corporate communications at OCBC Bank. The bank is also willing to finance the purchase of units in ageing 99-year leasehold properties with less than 60 years on their leases, for instance. Banks will also selectively provide financing for commercial properties with less than 30 years left on their leases, but that’s on a case-by-case basis, adds Ng.

There are also no restrictions on foreigners buying commercial property. However, it is more difficult for those with no clear income or cash flow stream to obtain financing, as they have to provide documentary proof of these sources of money, says Koh in a statement.

According to Koh, OCBC Bank has seen “a significant increase in the number of commercial property loan applications since January”, a reflection of the improved economy and new commercial projects launched this year.

While there may be a pull-back in the residential sector resulting from the recent government measures, commercial properties provide an alternative investment avenue for investors. “It’s an interesting market for cash-rich buyers, given the limited supply, especially for shophouses, retail and  strata-titled office units in the CBD, as well as those located near MRT stations,” says Knight Frank’s Sai.

Cecilia Chow is City & Country editor at The Edge Singapore

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 826, Oct 4-10, 2010