CBD strata unit offices on the up

4:15 PM Tuesday September 25, 2018 True Commercial

The 10-level Hobson West Towers, (with brown and blue facing) at 26 Hobson St - in which Colliers International is marketing level 6A for sale - is an example of a strata titled office property. Photo / Supplied

Strata titled unit offices in Auckland’s CBD are becoming more desirable to invest in, says Tony Allsop, investment sales director for Colliers International.

Allsop, who specialises in Auckland CBD property, sees occupier demand for strata unit offices rising due to tenants placing a premium on character spaces better-adapted for small businesses and flexible working.

“Strata titles are also more attractive to those priced out of the single-title CBD office building market,” he adds. “They allow separate owners to acquire sections of a building — typically a single floor or office suite — rather than single ownership of a whole building.”

Strata titles have traditionally been under-priced and under-rented, but Allsop says that is changing as record-low yields and high occupancy rates have made the CBD office market more competitive.

“While the entry threshold for an Auckland CBD building is often $10 million or more, strata titles can be acquired for significantly less, but show equally strong returns.

“Strata units also offer the potential for strong rental gains, especially when it comes to sought-after character properties with quality fit-outs, abundant natural light and good locations. Auckland CBD office rents have increased by 3 per cent and 2 per cent for the prime and secondary sectors in the past year, according to our research.

“The strata unit rental market has not experienced the same uplift, typically because owners have been highly focussed on capital value growth rather than maximising rent returns.”

Allsop says Auckland CBD’s strata unit office market is particularly popular among smaller businesses with staff of between eight-to-25 people.

This is supported by Colliers’ research showing CBD strata units typically have floor areas of between 135sq m and 420sq m, or about 16.7sq m per person.

However, occupation ratios are tightening due to a surge in demand for flexible working and co-working office space in recent years.

“The co-working sector has doubled in occupation over the past three years,” Allsop says.

“This sizeable upswing in demand has pushed occupation ratios to 8sq m to 10sq m per person, especially in new purpose-fit premises.”

Chris Dibble, director of research and communications at Colliers, points out that the forecast is for more demand in this “globally dynamic” area of modern office working.

“We’re anticipating greater demand for office space from the innovation and creative services sector in the Auckland Waitemata Local Board area.

“Demand from businesses with six-to-19 staff is now being conservatively estimated at between 21,250sq m and 29,200sq m of office space over the next five years.”

Dibble says co-working operators often rent out space at a significantly higher rate to the base rent to make ends meet.

As a result, smaller tenants are becoming accustomed to higher rent rates, especially if it means foregoing the hassle of rent and contract negotiations. “This suggests strata unit landlords have the ability to investigate raising rents in this typically under-rented sector.

“At the same time, strata unit investors and owners will still be able to focus on capital value growth in this low interest rate environment, with interest rates only expected to increase incrementally now by late 2019 to early 2020.”

Allsop says strata titles are a good option for smaller owner-occupiers who want to insulate their businesses against future rent increases.

“Property cycles tend to last seven to 10 years, so if a business is planning to stay put over the medium term, buying a strata office can make a lot of sense.

“Strata titles also give owner-occupiers flexibility; there may be the ability to purchase additional titles in the same building as the business expands in the future.

“Alternatively, the rise of flexible working allows owner-occupiers to add or remove additional space to their portfolios as required. This is particularly useful for start-ups in growth mode, or companies that engage in one-off contracts requiring additional space over a fixed period.”

Allsop says strata titles allow companies to be based in the CBD, which offers numerous business and staff benefits.

“Auckland central has a greater level of amenities than any other office location in the city, with numerous transport options, retailers, bars, cafes, supermarkets, and cultural and entertainment options.

“Being in the city provides ample opportunities for networking, as well as easy access to professional services firms that companies deal with daily.

“Strata titles also allow smaller businesses to be located in prestigious or character buildings that would otherwise be unattainable.”

Globally, strata titles are big business. A recent Bloomberg report found a staggering US$38.9 billion (NZ$58.57b) of strata titles have changed hands in Hong Kong alone in the last five years.

The report said businessman Johnny Cheung Shun-yee made about US$115 million (NZ$173m) in just nine months from buying and selling two office floors in The Center, a prestigious Hong Kong skyscraper.

“We’re unlikely to see such eye-watering deals in Auckland anytime soon, but it does go to show the enormous global appetite for strata investments,” says Allsop.

“As an asset class, strata units are on the up and up — so it’s a great time to invest or own and occupy.”