From IN THE BLACK April06
The big debate on property is whether to rent or buy. When property values and rents are falling the market favours the renters. But when the market is in an upswing – as it is now – owning a property can shield against rent rises, an attractive option for small business owners.
One option is the strata office. The fact is that 71 per cent of strata office buyers are the occupiers themselves, while the remainder are investors.
Kevin Stanley is regional director, global research and consulting at CB Richard Ellis. ‘The purchaser groups are very much small business and small family business who want to control their destiny in a property sense and use it, especially in places like Sydney, as a shield from high rentals,’ he says. ‘It becomes an investment for that business, becoming a sort of superannuation, plan if you like.’
Strata has shrugged off its bargain-basement image. The average capital value is $5,913 sq m, according to research from Savills. The reason for this is that the market is diverging between suburban buildings and higher-end premium offices mainly located in the Sydney CBD.
There is a total of 447,602 sq m of strata stock in Sydney, about 9.6 per cent of the total, and averaging about $190 million in sales each year.
Chris Freeman, national research director at Savills, says that in 2005 the average size was 141 sq m. Of 208 sales tracked in 2005, 123 were for suites less than 100sq m. ‘Well and truly, the bulk of the sales are the smaller suites,’ Freeman says. Only 10 sales were for suites bigger than 500 sq m in size.
The costs of good strata offices are by no means cheap in Sydney, however. ‘You can pay $10,000, $11,000 per sq m,’ Stanley says. ‘It’s an incredible price. But the motive is not always obvious as it is very much a long term hold.’
The high prices paid for strata in iconic buildings has enticed developers into the market, adding to the supply of quality offices on the market. Savills’ Freeman says there are currently 22 strata office projects in the Sydney CBD, with 34,143sq m of current stock available for sale. These projects also have 34,001sq m space that is unavailable for sale due to being under lease or not refurbished. ‘While demand has remained steady, and average prices have risen due to the increased quality of stock, absorption levels seen in current projects are typically slower than two years ago,’ Freeman says.
This means that developers who want to shift stock are prepared to offer incentives. For instance, 5 Hunter Street, a 1970s building on the corner of George St and opposite Wynyard Station in the Sydney CBD, is a prime location. But attractive deals can be had for strata offices from 38 sq m to 560sq m in size at about $5,000 sq m or under.
Freeman says now is a good time for occupiers to move into the market.
For a small business, owning a strata property shields against rent rises. Any small company in Perth with a rent review this year will be seeing a 30 per cent increase in rents.
The story is similar in Brisbane and about to emerge in Sydney. ‘We think rents are going to rise significantly over that time,’ Freeman says. ‘Being in strata will give occupiers the ability to avoid that.’
As with the property market as a whole, the best buildings in the best locations command the best prices and make the best investments. Think iconic locations, historic buildings or great views. Businesses that bought into the first tranche of King St Wharf in 2000 for $7,500 sq m are laughing, with the space now worth $12,000 sq m. The refurbished former Qantas building at 1 Chifley Square is currently selling for about $7,500 sq m.
‘You are better off initially to … pay a premium and get a place that is always going up,’ Freeman says. ‘You’ve either got to go for something absol-utely fantastic or grab an absolute bargain. I just wouldn’t go that middle of the line.’