Strata commercial property deals seen to stay tepid this year

Singapore - STRATA commercial property transactions are expected to remain tepid this year, after plunging to their lowest levels in 2015 since the global financial crisis, as high vacancies in recently completed strata commercial developments and waning rents keep wary buyers on the sidelines.

The number of strata office transactions plunged to 227 worth S$758 million in 2015, from 517 deals worth S$1.68 billion in 2014, based on Knight Frank's analysis of caveats lodged. Strata retail transactions also dived to 221 deals worth S$393.7 million in 2015, down from 475 deals valued at S$918.6 million in 2014.

The number of transactions last year marked the lowest level since 2009 for strata office space, and a record low since 2008 for the strata retail segment.

Things are still not looking up for now, commercial brokers reckoned. "With the slower economic outlook, projected demand for strata office and retail units could slow further in H1 2016," said Mary Sai, executive director and head of commercial sales at Knight Frank.

"Furthermore, high vacancies in several recently completed strata commercial developments are deterring discerning buyers - particularly those with stable income investment objectives - from entering the market."

In terms of prices, strata office units held up better last year, with average prices of transacted (freehold and leasehold) units rising 8.1 per cent to S$2,439.24 per square foot (psf). The average price for strata retail units slipped 16 per cent to S$2,958.84 psf in 2015, likely dragged by lower selling prices of leasehold retail units at High Park Residences.

The sole freehold office transaction in the primary market in H2 2015 was a unit at Crown at Robinson, located in Tanjong Pagar, at S$3,502 psf. For leasehold strata office, Vision Exchange was the best performing new sale project with seven caveats recorded during H2 2015, accounting for 36.8 per cent of the total new sale leasehold transactions in the period, Knight Frank has found.

Century 21 Singapore CEO Ku Swee Yong noted that prices of strata commercial units had run up too fast in the heyday of 2011-2013 before investors were hit by the harsh reality that many completed projects could not be tenanted easily or could not achieve the promised rents.

There are completed strata commercial projects that still have many vacant units, going by the examples of Novena Regency, Alexandra Central, Centropod@Changi, Alexis@Alexandra, Icon@Changi and Viva Vista at Pasir Panjang, just to name some.

Interest rates for commercial loans will also rise faster than residential loans, Mr Ku added. "Tenants in the retail space have been shrinking due to competition from e-commerce, lack of frontline service staff and a shrinking tourist dollars pie. Total visitor arrivals may have remained flat, but tourism receipts are likely to have dropped due to the stronger Singapore dollar against the rupiah and the ringgit."

Steven Ming, Savills Singapore managing director and head of investment and residential services, said that he expects demand for strata commercial units to remain soft this year. "Against a projected weak economic backdrop, few businesses will be on an expansionary mode this year. Rising interest rates will keep a lid on transaction volume as well."

But amid the muted investors' interest in strata commercial space, CBRE director for investment properties Galven Tan believes that owner-occupiers may be looking out for value buys.

"There is a pricing gap that can be bridged this year if sellers are realistic. For strata office, there is still a long-term desire for businesses to own it if the price is right," Mr Tan said. "If a good quality asset in a good location comes along, they will pick up, rather than choose to keep themselves at mercy of the landlords."

Interestingly, the proportion of Singaporeans buying strata-titled offices surged from 18 per cent in H1 2015 to reach 31.8 per cent in H2 2015. There was a 59.1 per cent increase in the number of Singaporeans buying strata offices, Knight Frank has found, attributing this to more office units being transacted below the more palatable S$1 million price tag.

But Ms Sai flagged that the strata office leasing market is facing competition from co-sharing office spaces, which are gaining traction with small-office tenants occupying less than 1,000 sq ft. Under the co-sharing office space scheme, the tenant can leverage on common amenities such as meeting rooms, pantries and reception areas.

Strata sales of shophouses emerged as an outperformer last year. It is a niche market segment where consultants still see demand holding up in the first half of this year.

While the number of shophouse transactions dropped to 85 in 2015 from 94, the total transaction value in 2015 was 5.7 per cent higher at S$593.5 million, Knight Frank found. Average prices of shophouses inched up 11 per cent last year to S$3,857.33 psf.

Mr Tan noted that the average price for a shophouse depends very much on what was up for sale and that those in prime locations could prop up the aggregate value in one period.

A shophouse is still touted as an attractive property asset over the longer term, given its rarity status with no future supply of conservation shophouses, Ms Sai said. Last year, shophouses in areas such as District 1 (Raffles Place, Cecil, Marina, People's Park), District 2 (Anson, Tanjong Pagar), District 8 (Little India), District 14 (Geylang, Eunos) and District 15 (Katong, Joo Chiat, Amber Road), remained popular among buyers. Some shophouses that were bought after the imposition of the total debt servicing ratio (TDSR) and sold in H2 2015 still reaped "reasonable" capital gains.

"Despite the slow property scene, the demand for shophouses is likely to be stable during H1 2016, with total transaction volume of between 40 and 50 units," Ms Sai said.

This article was first published on January 25, 2016.
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