The lure of strata commercial units

PRIOR to the preview of the freehold Oxley Tower scheduled for the end of March last year, K S Lim, a 37-year-old Malaysian investor, registered interest to buy a total of seven shop and F&B units in the project. The 32-storey mixed-use development is located at the corner of Robinson Road and McCallum Street in the CBD.

However, on the first day of the preview at Oxley Tower, there were queues and more than one interested buyer for many of the shop and F&B units. As a result, sales had to be conducted via a balloting system. Lim managed to secure one F&B unit in the project. All 129 strata retail and café or F&B units were snapped up on that first day of preview. Shop units measuring 118 to 409 sq ft were sold at $3,800 to $6,000 psf. F&B units of 398 to 807 sq ft were transacted at $6,200 to $7,200 psf. Office units released that first day went for $2,800 to $3,490 psf.

The launch of Oxley Tower set the tone for the strata commercial market in 2012. Last year, there were 21 new developments with strata shop units and a total of 721 units were sold. This was a fourfold increase from the 174 units sold in 2011.

Apart from Oxley Tower, other new launches last year that featured strata shop units for sale included Bugis Cube, located opposite Bugis Junction; The Promenade @ Pelikat in Hougang; Millage @ Changi, located next to the Geylang Serai Market; Centropod, on Changi Road; East Village, located off Upper Changi Road; and One Dusun Residences in Balestier. Most of the projects were launched in 2Q2012 and saw good response. This resulted in a strong first half, observes Png Poh Soon, Knight Frank's head of consultancy & research.

Even though the second half of the year saw a slowdown in activity, the strata commercial property market in 2012 still ended on an all-time high in terms of sales. Overall, investors poured more than $3.7 billion into strata commercial real estate last year, according to figures from Knight Frank Research. The figures are for both new and resale transactions of strata shops and offices. Average unit prices of the various strata commercial properties have also risen island-wide. The average price of strata shops jumped 28.4% y-o-y from 2011, while the average price of strata offices gained 6.4% in 2012 compared with the previous year.

To some extent, the strata shop resale segment had also benefited from spillover interest and brisk sales at new project launches. Transaction volume climbed 18.1% from 454 deals in 2011 to 536 in 2012, according to figures from Knight Frank. Strata retail units in the Central Region were the most sought after, with developments such as The Adelphi and Sim Lim Square seeing more than 30 units changing hands last year.

Property consultants attribute the standout performance to a combination of factors: historically low interest rates, the series of government property-cooling measures in the residential sector and the lack of alternative investments. "Singaporeans' love affair with property and the government measures in the residential sector have resulted in some money being diverted to other sectors, such as strata office, retail or industrial," says Jeremy Lake, CBRE's executive director of investment properties.

Will transaction volume of strata commercial projects be sustained?

This year, demand is likely to be driven by new launches. "The momentum is likely to continue, and with more projects being launched, more buyers are likely to enter this sector," says CBRE's Lake. "Sentiment is positive and, so far, no warning lights are flashing yet."

Danny Yeo, group managing director of Knight Frank, agrees. However, with so many new projects in the pipeline, investors will be spoilt for choice, he says. "Projects that are well positioned or located within a short distance of major transportation nodes or major catchment areas will be better received."

A mixed-use project that is targeted for soft launch at end-January is Alexandra Central by CEL Development, the property development and investment arm of listed construction and property group Chip Eng Seng. The Alexandra Central project is located on the site of the former Safra Building, next to Ikea, on Alexandra Road. CEL Development paid $189 million, or $789 psf per plot ratio (ppr), for the 99-year leasehold 85,517 sq ft site in December 2011.

The development will include a 450-room four-star hotel managed by Park Hotel Group, which will take up the top 13 floors in the 19-storey tower. The six-storey podium block will house the hotel facilities on its rooftop, about 200 strata retail and F&B units on the lower three levels and a multi-storey car park on the upper three levels. Construction is said to have begun in 4Q2012, and the hotel is targeted to open in 1H2015.

Property agents expect the mixed-use development to see strong interest, given its city-fringe location in the up-and-coming Alexandra neighbourhood, in the vicinity of Queensway Shopping Centre, Alexandra Village, Anchorage and Anchor Point mall. Within a short drive are private condominiums on the other end of Alexandra Road, such as Metropolitan, Ascentia Sky and City Developments' recently launched Echelon, which saw more than 75% of the units sold within the first week of 2013. The strata shop and F&B units at Alexandra Central are likely to be priced at $5,000 to $7,000 psf, according to market sources.

Far East Organization has also started registration of interest for its SBF Center, with the sales launch targeted for early February. The 31-storey SBF Center is a 99-year leasehold mixed-use commercial development with dual frontage on Robinson Road and Cecil Street. It is next to Capital Tower and the entrance to the underground Tanjong Pagar MRT station.

SBF Center will contain 48 medical suites located on the third to fifth levels, with sizes ranging from 665 to 1,290 sq ft. There are 192 office units on the 10th to 28th levels, with unit sizes of 560 to 1,475 sq ft. The top three levels contain large floor-plate office units of 10,890 sq ft each. Word on the street is that there is strong interest from buyers looking to purchase whole-floor office units.

Prices of the strata office units will start from $2,400 psf, while those of the medical suites will start from $3,500 psf. The project, formerly called The Index, was renamed SBF Center after the Singapore Business Federation signed up for 20,000 sq ft of space in the building.

Other new commercial mixed-use projects in the pipeline for launch this year include the redevelopment of the former Hong Leong Garden Shopping Centre by a consortium of niche players led by Oxley Holdings; the former McDonald's Place at King Albert Park, also by Oxley Holdings; KeyPoint on Beach Road and the former Tai Keng Court in Hougang, both of which are being developed in a joint venture by Fragrance Group and World Class Land; as well as Novena Ville, a redevelopment by Fragrance Group.

Another project that could be in the pipeline for launch is the white site in the Novena neighbourhood, which was sold to Hoi Hup Realty and Sunway Developments for $492.5 million, or a record $1,632 psf ppr, at the close of a government land tender last month. The joint-venture partners are likely to develop the site into a mixed-use project comprising a hotel and strata commercial units for sale, reckons Knight Frank's Yeo.

'Phantom' retail space
The influx of new strata shops over the next few years may result in landlords finding it difficult to get tenants, especially small retail occupiers with modest space requirement, says Letty Lee, executive director of retail for CBRE. "We should not ignore the pockets of retail space being completed in various mixed-use developments, strata-titled shops as well as "phantom" retail space [arising from non-traditional retail space in industrial parks, business parks and warehouses] that are starting to emerge island-wide," she cautions. "This will add to the competition for potential occupiers, [putting] downward pressure on rents, particularly for suburban malls, over the next six months." According to CBRE, prime suburban rents averaged $29.75 psf a month, holding firm from a year ago.

The government is also concerned about the proliferation of too many small strata commercial units in a single project or a clustering of such small units in a particular location, which could lead to traffic congestion, especially if there is insufficient car-park space. Last October, URA set informal guidelines on shop sizes in new projects. For instance, it is encouraging a minimum of 50% of retail units to be of at least 60 sq m (about 646 sq ft), says Knight Frank's Yeo. There is also a cap of 10% on the number of small units in the 15 to 24 sq m (about 161.5 to 258 sq ft) range, and the discouraging of units below 161.5 sq ft. URA is also recommending 100 sq m (1,076 sq ft) either as a minimum or an average unit size for strata office units.

This is similar to the stance the government has adopted in the strata industrial segment, where a minimum of 15 sq m (1,615 sq ft) has been introduced. The government has also halved the tenure of industrial sites for sale in public land tenders from 60 years to 30, or even 22 in some cases. For certain industrial sites, there is a 10-year restriction on sub-division. "Although there's a risk of further policy intervention in the strata industrial market, the government's position so far has always been to use targeted soft measures," says Donald Han, special adviser at HSR Property Group. "It has never come up with punitive measures in the industrial sector, like it has in the residential sector. Why? Because the industrial space is a small sub-set of the overall marketplace, [and] the strata commercial space, an even smaller sub-set."

The other concern is that while small strata commercial and industrial units may look affordable in terms of absolute price, the price psf is high. This is similar to the shoebox-apartment phenomenon in the residential sector. "That is why the authorities are monitoring the market very closely and making adjustments related to design and size rather than taking measures to cool down the strata industrial or commercial market," says CBRE's Lake.

Strata office transactions at record high
The strata office segment also hit an all-time high in terms of transaction volume for projects with units sold off-plan. There were 985 such deals worth more than $2.1 billion last year. This is despite weakening office rents due to macroeconomic uncertainty. "[The transaction volume] was partly driven by the attractive new developments in desirable locations being launched for sale," reckons Knight Frank's Png.

New launches with strata office units for sale made up 58% of all transacted strata office units in 2012. The top-selling projects with the most transactions were Paya Lebar Square (average transacted price of $1,753 psf), Eon Shenton ($2,517 psf) and PS100 ($3,107 psf).

In the strata office resale market, however, there was a 2% y-o-y drop in transactions from 2011, which saw 418 deals. Units at The Central at Clarke Quay and International Plaza in Tanjong Pagar were the most sought-after, with each project seeing more than 40 transactions in the past year. The strata office resale market is expected to hold steady in 2013, with end-users looking to buy their own space, while investors continue to look out for long-term investment opportunities, says Knight Frank's Png.

With the looming threat of more government measures, and an onslaught of new supply, many are of the view that the residential market is now "toppish", says Knight Frank's Yeo. "The moneyed crowd is therefore looking for alternatives. Strata commercial [property] is, and will continue to be, the next wave."

As long as the current low-interest-rate environment remains and liquidity continues to be high, capital values of commercial properties are likely to continue to grow in 2013, writes Pang Ti Wee, an analyst at OSK Research, in a Jan 9 report. This is despite further pressure on rental rates and greater yield compression, he adds.

This story first appeared in The Edge Singapore weekly edition of Jan 14-20, 2013.

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