Strata Title Office and Residential Condominium Investments

In Cambodia, the idea of Strata-title office buildings where individual units is being sold has not been favoured by end-users or investors. There were almost no new launches taking place in Phnom Penh until recently. However, the residential condominium market in Phnom Penh has expanded rapidly over the period.

Strata offices make up only a very small percentage of the total of Phnom Penh’s modern office stock. Office rentals have been stagnant over the last few years and it comprises less half of the total supply in non-Central Business District (CBD) locations. Almost all of the upcoming strata office stock is of Grade A or Grade B quality located far away from the CBD.

In general, strata office buildings have lower occupancy levels than single-ownership buildings and achieved lower rents. This is because tenants, especially multinational companies prefer to deal with a single landlord, simply because it brings more flexibility, and often efficiency offered by a single ownership structure.

We have noticed the trend that there has also been limited end-user purchaser demand for strata office space. Multinational companies prefer to rent, rather than own office spaces so that their capital can be employed in their core business and not in property investment. Renting office spaces allows these tenants the flexibility to expand or contract offered through short to medium-term leases.

For local companies and businesses, they also want the flexibility of renting. Most large Cambodian companies, want to own a property or a whole building rather than several floors in the strata building. “Most companies want the flexibility when it comes to leasing or owning the office spaces because the economy and the market are so dynamic these days. Many companies anticipate their buisness will grow significantly in the upcoming years so their office space requirements will also change accordingly,” explained Chan Mlop Sokha from Sokha Law Firm.

The result of lower than expected growth in office rentals, low occupancy and limited end-user purchaser demand are reasons developers decided not to build new strata offices. For the existing buyers, they are also worried about limited resale activities in strata offices. With the current launched buildings, there have been minimal resale activities and limited increases in prices – this applies to even better quality, better located strata office buildings.

With the overall office vacancy stands at 15 to 20 percent, tenants will have ample choice and companies on lower budgets are offered with plenty of options in the market to lease premises.

In the end, gross yields in office buildings can hardly be better than the rental yields of residential condominiums, but it will be more stable, due to a lower turnover of tenants as a result of longer leases and this also means less frequent payments to agents to secure new tenants.

“I wouldn’t investing in either one – residential or office – depending on the property and the location. If they are located in a nice location with better returns, “Nguon Chhayleang, the CEO from the Pointer said.

To manage a strata office investment, the owner has to be aware that some equipment needs regular maintenance, for example the air-conditioning units. Office tenants are responsible when they vacate the property for reinstating the premises, to the pre-handover condition. After all, there will be far lower redecoration costs than furnished residential properties for strata office investment.

However, the prices of strata office buildings in Phnom Penh are generally well above replacement construction costs and they are generally more expensive than the nearby residential condominiums. In the long-term, I believe prices for higher-quality, better maintained buildings are able to attract tenants. This may present an opportunity for investors to capitalise on favourable yields.

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