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Strata office market still going strong

Posted by on in Residential
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The strata office market could see prices rise by 5 to 8 per cent as the buying momentum continues into this year.
Transaction volumes crossed a third of last year's levels in the first five months of 2013, in what is shaping up to be a year when sales volumes are unlikely to match 2012's peak.

Last year, sales of new and resale strata-titled offices reached an all-time high of $2.29 billion, 81 per cent more than the $1.27 billion in 2011. The number of deals last year - 1,059 - were more than double the 508 in 2011.

Even while volumes thin, prices are likely to see modest growth.

Strata office buildings take up 6.3 million square feet or 12 per cent of the total islandwide office stock. Of this, about 91 per cent lie in the CBD and fringe areas.

Between this year and 2016, 1.2 million sq ft of strata office will be completed.

Last year, average prices went up by between 7 and 20 per cent; Grade A office capital values, however, fell 8 per cent over the same period.

The concept of strata-titled office ownership has been popular for many years, but it actually took flight in late 2011, with a string of new office projects such as EON Shenton, Oxley Towers and Paya Lebar Square coming on the market.
New projects have accounted for 36 per cent of total strata office sales since 2011, compared to just 5 per cent in the 2008-2010 period. It further noted that prices of new projects are typically 15 to 20 per cent higher than resale buildings in the same locations.

The keen interest seen in this asset class can be attributed to its small but positive yield spreads and its affordability. Current net yields for freehold units stand at 2 to 2.5 per cent; for leasehold units (pegged at 65 years' lease remaining), current net yield is 3 to 3.5 per cent, as investors expect faster returns.

The total price quantum ranges between $770,000 and $1.95 million.

Small and medium-sized enterprises are also increasingly preferring ownership for certainty in long-term operational costs. About 40 per cent of buyers acquire such properties for owner occupation and usage.

The sector has attracted interest from foreign companies. Mostly of Chinese and Asian origin, these organisations account for 20 to 30 per cent of strata deals, given that the sector has no foreign-ownership restrictions.

Risks remain. Given the dearth of rental data pertaining to this market, investors who make investment purchases without sufficient information on actual achievable rents risk asset mispricing and failure to meet expected return.

In addition, given floor size limitations and multiple owners, such projects are typically leased out to SMEs, which could have less secure cash flow than prime corporate tenants.

Investors should be aware that all strata properties incur service charges for day-to-day maintenance and additional sinking fund charges. The total outgoings for strata offices are around $0.45 to $0.80 per square foot (psf), against a range of $0.10 to $0.30 psf for residential properties.
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