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Transactions of strata commercial properties hit new lows

While prices of office strata units may hold up for now, the prices for retail units face more downside risks
Wednesday, June 17, 2015 - 05:50
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Buying sentiment for strata-titled commercial properties continues to cool amid tapering demand from both end-users and investors, sending transaction volumes to new lows since the global financial crisis.

Singapore

BUYING sentiment for strata-titled commercial properties continues to cool amid tapering demand from both end-users and investors, sending transaction volumes to new lows since the global financial crisis.

Easing business activities have crimped demand from end-users, and individual investors are having their borrowing capacities capped by lending curbs.

Based on Knight Frank's analysis, the number of caveats lodged for strata office units between January and May plunged 72.7 per cent from a year-ago period to 81 - the lowest level since the first half of 2009, when 63 caveats were lodged.

In the retail space, the number of caveats lodged for strata units fell 58.4 per cent year on year to 84 in the January-to-May period - the lowest level since the second half of 2008 when 80 caveats were lodged.

Knight Frank head of research and consultancy Alice Tan, citing slower business activity and the total debt servicing ratio (TDSR) among the dampeners, said: "Overall transaction volume is anticipated to remain low at around 400 to 600 units for the full year, as buying sentiment for strata-titled commercial properties continues to be hampered by a few main factors."

Average prices of strata commercial space tends to be volatile across periods due to the lumpy nature of these transactions. Based on Knight Frank's estimates, which mitigated such volatility by factoring in total transaction value and size of the units, average prices of strata offices are still holding up for now.

Buoyed by new development Crown @ Robinson in Tanjong Pagar, new freehold office units averaged S$3,467 per square foot in the first five months of this year, up 17.8 per cent from S$2,944 psf in H2 2014.

But the average price for resale freehold offices dipped 2 per cent to S$2,551 psf.

Among leasehold offices, both new sale and resale units staged a 17 per cent rebound in average prices - to S$2,646 psf for new units and S$2,341 psf for resale ones.

Ms Tan said: "Owing to limited available stock of smaller-sized units for sale, office spaces in the CBD will remain sought after, especially from investors looking at bulk purchases of strata-titled units."

But she added that, with office rents easing amid economic uncertainties, further price increases of strata offices will be capped in the later half of this year.

Cushman & Wakefield research director Christine Li noted that, with most office buildings here in the hands of major landlords and Reits, the only way for individual investors to ride the upcycle is through strata office units, which remain limited in supply.

From the second half of this year to end-2017, there will be an additional 1.62 million square feet of strata office islandwide, of which only 500,000 sq ft is Grade-A office space in the CBD, she estimated.

With limited new launches in the pipeline, strata office volumes will remain subdued for this year.

As for strata retail units, consultants note that challenges confronting retailers are still weighing on rents and putting a cap on buying demand.

Average prices for new freehold retail units climbed 22 per cent to S$3,919 psf in the first five months of this year from S$3,525 psf in H2 2014; this was mainly buoyed by two transactions at Novena Regency that commanded a price tag of S$6,473 psf; the average price of resale units, however, slipped 6.8 per cent to S$3,483 psf, data from Knight Frank shows.

Retail units with leasehold status also presented a mixed picture: among new sales, the average price slipped on lower selling prices of retail units at Kingsford Waterbay; among resale units, the average price inched up due to two caveats lodged at The Arcade, which recorded S$7,876 psf and S$12,077 psf.

CBRE head of research for Southeast Asia Desmond Sim said: "Location and amenities play a very important role in rental and pricing and will be reflected in the success and transacted prices of these strata projects."

He noted that the average prices of strata commercial units tend to be skewed by the supply of new units in the market and the type of units being transacted.

URA data compiled by Knight Frank also indicated that Singaporean buyers accounted for only 18.3 per cent of office caveats (including those for non-strata properties) lodged in the first five months of this year, down from 31.6 per cent in 2012.

Companies made up 70.7 per cent of office caveats, up from 54.7 per cent in 2012.

Singaporean buyers' share of retail caveats also fell to 39.8 per cent in the first five months this year, from 56.4 per cent in 2012; meanwhile, companies' share of retail caveats rose to 49.4 per cent, from 35.7 per cent in 2012.

Since the implementation of the additional buyer's stamp duty on residential purchases in December 2011, there has been a notable shift in liquidity into the commercial market, Mr Sim said.

"But at the same time, we noticed that for stabilised assets - completed projects and bigger floor plates - they tend to be companies or long-term investors; smaller investors tend to gravitate towards uncompleted projects because the capital outlay is smaller and the required loan is disbursed only on project completion. That is also slowing down because TDSR is playing a role in credit control."