When Straits Times published an article about the high vacancy rate of newly completed strata-titled office developments like Paya Lebar Square and Robinson Square, it truly brought home the point that investing in commercial offices is a totally different ball game from residential properties investment.
I’m writing this article with the benefit of hindsight but it is exactly with this benefit that one can learn from the investment experience of others and use it to make better investment decisions in the future.
So, why is there such a high vacancy rate in Paya Labar Square and Robinson Square? Is it because both development have the word ‘Square’ in them? No, of course not. In fact, at a cursory glance, there is no reason to doubt the popularity of these two developments, but there is always more than meets the eye.
Let’s start with Paya Lebar Square.
Paya Lebar Square is located right next to Paya Lebar MRT, the interchange hub for both the East-West and North-East MRT Lines. That alone guarantees transportation convenience and human traffic. It is also a brand new development with clean modern design, not a refurnished one. With the government advocating and planning for regional hubs in order to ease the congestion in the CBD and to encourage more of the workforce to work closer to home, it stands to reason that the popularity of Paya Lebar Square offices would shoot through the roof. An investment in one of the units would be a ‘slam-dunk’. Really?
First, any office property investor must understand is that when a business owner determines the location of his or her office, the mindset and criteria are very different from someone who is looking to rent a residential apartment. After assisting and securing offices for so many companies, we realized that most, if not all business owners have the following criteria:
1) Location, Location, Location
First and foremost, a business owner has a specific reason to relocate to a certain location. For many law firms, the proximity to the State and Supreme courts is crucial if their lawyers need to attend hearings. For other companies that provide supporting services to their MNCs clients, it make sense to be located near them to facilitate meetings or other matters. This is why once you have a critical mass of MNCs in one locations, companies supporting them will congregate nearby and form a de-facto business district. An obvious example is Raffles Place where you have numerous banks and MNCs with supporting law firms, accountancy firms, executive recruitments firms, etc nearby.
The question for Paya Lebar Square is – is there a cluster of MNCs present? If not, then what reason?
Would a business owner whose main business is to support the MNCs want to relocate there?
2) Rental Rate – It has to be Competitive
When a Paya Lebar Square office investor contacted us to market his unit, we are of the view that his asking rate of about $6.50psf was on the high side. If you are a subscriber to our Griffin Intelligence Office Rental Rates Chart which is updated monthly, you will notice that there are office buildings in Tanjong Pagar asking for that rate or even lower. Granted that Paya Labar Square is a new development while those asking similar rates in Tanjong Pagar tend to be refurbished or older buildings, there is still no denyling that Tanjong Pagar is the better and more convenient location. To put in the residential property context, would you invest in an older apartment in Orchard or a brand new apartment in Paya Lebar if the price is about the same? The choice is obvious.
Most of the strata-titled units sold at Paya Lebar Square range from 500sqft to 2000sqft with a few going up to 5000sqft. This range of sizes would only suit SMEs or small MNCs. The owners of such companies are mostly in ‘Survivor’ mode and achieving the lowest overheads is their all-consuming concern. The relatively high asking rent at Paya Lebar Square is of no help. Those businesses that can qualify for B1 Clean industrial space will relocate there and this that cannot qualify, there are options available in Eunos or Aljunied at a lower price.
Larger MNCs requiring space in excess of 5,000sqft would not consider leasing from different strata-titled owners due to the difficulty of negotiating and renewing the lease in the future, thus reducing the chances of supporting SMEs relocating there too.
3) Where does the Business Owner Live?
One would get the idea from reading various news and HR articles that staff welfare and retention is paramount in today’s competitive business landscape. Therefore, for a company to thrive, a business owner should locate his or her office in a central location near an MRT station, preferably in a new building with plenty of retail amenities and eateries to cater to the staff needs.
From our experience, that is not the case. Surprising and counter-intuitive, but true. In fact, more often than not, the business owner would select an office near where they live, assuming that such a location meets the two above-mentioned criteria. Interesting, isn’t it? I would even go as far as to say that staff welfare and convenience consideration are secondary factors and considered as cream on a cake. Nice to have, but not critical. Of course, there are companies that really do value staff welfare but those tend to be larger MNCs.
Thus, for Paya Lebar Square, that would greatly reduce the number of potential tenants.
For Robinson Square, the above points apply as well, albeit with a couple of other factors like a lack of car park lots. The main reason why I think Robinson Square units are going a begging is the asking rental rate of $9 to $10psf. If you look at our Griffin Intelligence Chart again, you will see that there are quite a number of other similar boutique buildings asking or transacting at lower rental rates of between $7 to $8.50psf. And for $9 to $10psf, one could rent a space at more prestigious and conveniently-located buildings like Chevron House, RB Capital Building, 55 Market Street in Raffles Place. Any sensible business owner will make the obvious choice.