5 factors to consider when investing in office condos

MANILA, Philippines – Construction has been the best-performing sector as of the second quarter of 2013, and the continuous building of high-rise residential, commercial or mixed-use condominiums in Metro Manila is a concrete sign.

The growing business process outsourcing (BPO) and tourism sectors as well as higher private consumption and government investments contributed to the construction boom.

Melo Porciuncula, head of the Business Operations and Capital Markets of KMC MAG Group real estate services firm, said that with such growth came the increase in the benefits of investing not only in residential condominiums, but also office condominiums.

A better rate of return, a smaller market to compete in, relatively longer lease terms, less maintenance, wealthy corporate clients, consistent yields and regular escalation of rent are the advantages in investing in office condominiums.

Melo shared the factors to consider when investing in an office condominium with the audience of the 6th Money Summit and Wealth Expo at SMX Convention Center, Pasay City on July 13.

1. Location

Find a premier location. To date, there are 19 emerging business districts with approximately 1,300 hectares of developed land in Metro Manila. Makati City, Bonifacio Global City (BGC), and Ortigas Business Center remain the 3 primary central business districts.

“When you make dividends, you improve your space. When you have more people, you create more space,” Melo said.

He cited an example: “When Eastwood City in Libis, Quezon City was developed by Megaworld Corporation, no one believed it was going to be a success. Now, there is only 2% vacancy for office spaces there and it does not take long for them to be leased again,” Melo said.

Go where the talent pool is. BPOs prefer to set shop where potential employees are or live nearby. Thus began the development of BPO-driven “small cities,” such as Eastwood City, UP-Ayala Technohub, Eton Cyberpod Centris and Araneta Center Cyberpark, all in Quezon City.

And Melo is seeing the inventory doubling in the city by 2014 because of the increasing number of employees working at these sites, who are moving their families with them as well.

There are also the upcoming developments in Quezon City like Gateway Tower, Three Cyberpod Centris and SM Cyber West Avenue to watch out for.

The “next wave cities” or those arising investment sites for BPO firms like Baguio City, Davao City, Dumaguete City, Iloilo City, Lipa City, Metro Bulacan, Metro Cavite, Metro Laguna, Metro Naga and Metro Rizal, as well as centers of excellence like Bacolod City and Metro Cebu (joining Metro Manila and Metro Clark), also contribute to the steady rise in demand for office condominiums.

Consider the smaller market to compete in, and the smaller inventory. While a smaller competitive market is an advantage, the smaller inventory in office condominiums is a challenge.

For instance, The Net Group, the pioneer builder in BGC, remains the most invested company in office buildings in that location. “They are liquid. Business is doing well. Why sell? Inventory is very little there. I have closed all over the place but never in BGC. That is my dream, one day it will happen,” Melo shared.

2. Ownership structure

Do not be in a rush. Getting into the office condominium business has its challenges, such as prohibitive administrative requirements, higher costs to enter the business, limited preferred locations and balancing and future-proofing your inventory, to cite a few.

Such concerns must be dealt with accordingly, especially in balancing your inventory while transitioning your clients, which often poses a problem.

Have a plan. The ownership structure is a sticky and tricky matter in the office condominium business as it is difficult to transfer one property to another. Thus, Melo advised summit participants to consider estate and succession planning to ensure that the property will be in good hands.

For instance, you may opt to leave the property with one corporation, sell the corporation, but do not sell the property.

3. Capacity to maintain the property

Physically maintaining an office condominium is easier. Most companies today favor the open office plan ideal to staff with multiple workers.

Ceiling and air conditioning system are usually the basic fittings only provided by the owner. The rest of the fittings are to be shouldered by the tenant, and if there is a problem with lighting or plumbing, it is the tenant’s problem and not yours.

“Corporate clients are consistent tenants. We do not deal with personalities here. We receive our check every month or we get paid one year in advance,” Melo pointed out.

Be prepared for the costs. To keep your property in very good condition, you must be willing to spend a big amount of money, from high maintenance or expansion, also when appraising your property or determining the zonal value.

If you hire an accountant to do all your paperwork, including monthly declaration of taxes to the Bureau of Internal Revenue, it will be an additional administrative cost. The association dues will also continue even if your office condominium has been vacant for 3 months or so.

Size matters. Per leads gathered by KMC MAG Group from January to June 2013, preference for 40 square meters (sqm) to 100 sqm office condominiums is highest at 32.91%, followed by preference for 101 sqm to 150 sqm ones at 17.32%.

“In residential, when you expand, you decrease your rate of return (ROR). In office condominiums, it is all about the space. Expanding your office condominium means cost, but it also means business for you. Personally, I do not like leasing out 40 sqm to 100 sqm office condominiums since these usually are for start-ups. And we want consistent yields from the likes of corporate clients,” Melo cited.

Preference for office condominiums from 201 sqm to 250 sqm is at 6.19% from the same period observed, and Melo said such size is ideal for medium enterprises.

4. Cash flow

Diversify in office condominiums for better ROR.

Consider the following figures from KMC MAG Group: The rates for a 1-bedroom residential lease in Makati City range from P32,000 to P110,000 per unit. A premium office lease like that of The Enterprise Center ranges from P950.00 to P1,200.00 per sqm and Class A office lease like that of the Philamlife Tower ranges from P685 to P850 per sqm.

In BGC, a 1-bedroom residential lease ranges from P35,000 to P60,000 per unit. A premium office lease ranges from P750 to P875 per sqm while a Class A office lease ranges from P575 to P750 sqm.

In Ortigas Center, a 1-bedroom residential lease ranges from P20,000 to P50,000.00 per unit. Also in Ortigas Center, a Class A office lease ranges from P500 to P650 per sqm while a Class B office lease ranges from P450 to P500 per sqm.

“There is an opportunity in office condominiums, and Makati and BGC still have the highest rental rates,” Melo said.

Escalating rent can be done regularly. Unlike in residential condominiums, establishing a personal connection with your tenant plays a factor, and if you have a good-standing and long-staying tenant, you maintain the rent as long as you could.

In office condominiums, tenants not only sign up leases with longer tenancy, they usually have a higher budget for rental, showing that they can and are willing to pay the market price. “We’re here to make money,” Melo said.

5. Exit plan

Examine your time frame. Even if a tenant signed up for a 3-year lease, with an option for renewal for another 3 years, still be prepared for the worse.

Either they buy a bigger floor in another condominium building or finish the contract without renewal in case they could no longer afford your rent.

“Always think of the next step. Are you willing to sell at the lowest price? Prepare for the cycles, like have a 10- to 25-year plan for your property. You really do not lose money in commercial real estate but there are times that it is not prosperous.

The good news is the bull is expected to run for 5 to 6 years. There would not be a drastic fall in real estate but we are expecting it to plateau,” Melo added. – Rappler.com