The prospects of strata-title office developments

The prospects of strata-title office developments

Strata-title property is where individual units are sold by the end-users or investors. Lately there has been growing interest from yield-driven investors looking for an alternative to investing condominium units by investing in office buildings.

In the past, the market has seen almost no strata title office units launched while several thousand new residential condominium units have been made available. “The rates of return are actually growing at a faster rate if investors purchase other types of properties beside residential condominium units,” according to Chan Mlop Sokha from Sokha Law Firm. 

Strata-title office spaces make up about 30 percent of the future stock in Phnom Penh, with over 100,000 square metres of future office space supply found in locations outside the central business district (CBD). All of the future strata-title office units are either Grade-A or Grade-B buildings. In general, occupancy levels are generally lower than single-ownership buildings with lower rents for strata-title office units.

This is because tenants, especially multinational companies, prefer single-ownership buildings. They feel that the property management is better since they don’t have to deal with several landlords who own their leased space. On the other hand, strata-title office floor layouts are more inefficient - these units could not be further subdivided due to design constraints. This means that only a tenant who requires exactly the space being offered will be interested, whereas in a single-ownership building, there is more flexibility for landlords to subdivide spaces to match tenants’ requirements.

Furthermore, there has also been limited end-user purchaser demand for strata title space as most multinational companies prefer to rent rather than own office premises. Many businesses believe their capital should be employed in their core business and not in property investment. These multinational companies likewise want the flexibility to expand or contract their office space requirements. They prefer leasing rather than owning space so they don’t have to be stuck with owned premises. To meet future requirements, small companies want the flexibility of renting while large companies may just want to own a property, preferring a whole building rather than several floors in a strata-title office building.

Furthermore, strata-title offices are very different compared to leasable condominium units. There is a higher turnover of residential tenants since leases only usually last for one year. In contrast, most office leases in Phnom Penh are for three years and these office tenants tend to stay in leased premises for a lengthy period of time because of the amount of capital invested in their fit-out. This means that office rental income is more stable than residential income, because investors do not have to look for a new tenant every year which translates to no breaks in their rental income stream when the property is empty. On the other hand, they don't have to pay agents' fees as frequently to find a new tenant.

The management of the strata-title office units is also generally easier. For office tenants, they are responsible for restoring the premises to the pre-handover condition when they vacate the property (there will be far lower redecoration costs than for furnished residential properties). 

“I think office space is a good investment,” said Chhayleang Nguon, CEO of Ratanaka Realty. “More and more companies are moving out of villa offices to a professional building as it is much cheaper to rent space in a professional building in terms of having shared security, parking space and other amenities.” 

In recent years, there have been a growing number of knowledgeable investors starting to buy units in strata-title office units. From the investor’s perspective, they are attracted by yields that are more stable and higher than for residential condominiums, with less new supply compared to residential condominium units. 

I expect there will be more and more developers start to launch new strata-title office units. However, this trend will not apply to all strata-title office units because buildings that are less accessible or badly managed will end up attracting less interest to rent the spaces. 

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