Back in the 1990s, strata-title office developments were common in Bangkok and speculative buyers and investors would often purchase them off plan before completion with hopes of renting them out and/or reselling them at a profit.
A strata-title office is a development where the developer sells individual office units with their own title deeds, just like a residential condominium and governed by condominium regulations. This type of development is also known as an office condominium.
It allows the developer to realise returns on a development much more quickly than a landlord/leasing business model. It also allows buyers and investors to own the space, meaning that smaller investors can be office landlords without having to own a whole building.
There have been almost no new strata-title office condominium developments launched since the turn of the century as the financial crisis of 1998 halted development and crushed many buyer's dreams of capital appreciation as rents and occupancy dropped.
In Bangkok, there is currently approximately 8.78 million square metres of office space and only around 2 million sq m, or about 22%, is strata title. The performance of strata-title offices has not been as good a single-ownership building in terms of rents achieved and occupancy. There are several reasons for this weaker performance.
Firstly, many of the speculative office condominiums sold and built in the early 1990's had a lower specification than many of the single-ownership buildings completed in the same era and they now look very dated compared to the high quality of most recently completed office developments in Bangkok.
Secondly, tenants prefer single-ownership buildings, so they only need to deal with one landlord to expand and not multiple landlords. Also, building management has generally been better and the space efficiency is usually better in single-ownership buildings.
Thirdly, many of the older office condominium units had washrooms inside the sold/leased space rather than in the common area and had air handling unit equipment rooms inside the unit as well. This is space that had to be paid for, but effectively could not be used. Tenants do not have to pay rent for this space in most single-ownership buildings.
Just as in a residential condominium, there are some inherent risks to buying a property in a building where the common areas are shared between many co-owners.
Maintenance is key. If a strata-title office is not well maintained, it becomes run down quickly and the value of the property will drop. The matter is more complicated than a single-ownership building as it involves many parties and they must all pay their common area management fees on time and agree to capital contributions for renovation and improvements, or the building deteriorates. (continued below)
CBRE finds that most large Thai companies would rather build and retain 100% of their own offices than buy in a strata-title building. Multinational corporations tend to rent space rather than buy because it gives them flexibility in terms of expansion and downsizing in the market.
Most Thai SMEs would rather rent office space because it does not require as much capital, allows them flexibility as they grow and downsize and there is more choice of buildings in prime locations located along mass transit lines.
CBRE has received more enquiries in 2018 for strata-title offices and acted as a sole agent for the biggest strata-title transaction in 2017 for the sale of space in Sathorn Thani, but there have been few other sales transactions, due mostly to the lack of options in the market.
For the first time in over 10 years, developers are building or considering developing new office condominium projects. Siamese Asset recently completed a 5,200-sq-m, seven-storey office condominium called the Blossom Office in the Sathorn-Charoenrat Road area where buyers can purchase office units from 270 to 460 sq m.
CBRE, the sole sales agent for the project, believes that the rise in office rents means that there are more small and mid-size private investors who would like some exposure to the office market without having to own a whole building, which would not be practical as the total price would be too high.
There is also some demand from Thai SMEs in the service business who previously might have bought a shophouse but now want more modern premises.
Despite this increase in demand, office condominium development will likely remain a niche sector in Bangkok because most tenants will continue to prefer to rent in single-ownership buildings.
There is limited new office space due for completion between now and 2022, but after that date the market will have a wave of new office completions -- many of them high specification, state-of-the-art developments next to mass transit stations in prime locations. This will make the rental market more competitive with the best buildings in the best locations being able to achieve the highest occupancy and rents.
There will still be some demand for strata-title offices from owner-occupiers as some local companies will want to own rather than rent.
The extension of mass transit lines to more midtown locations with lower land costs means that developers could build strata-title offices next to new mass transit stations with more affordable prices. This means that some buyers will combine their occupation requirements with an investment satisfying their need for space with the possibility of an appreciating property.
Nithipat Tongpun, Head of Advisory & Transaction Services - Office, CBRE Thailand. He can be reached at bangkok@cbre.co.th Facebook: CBREThailand Twitter: @CBREThailand LinkedIn: CBRE Thailand and website: www.cbre.co.th
