MODEL FIRST-CLASS OFFICE BUILDING
Land 30,000 sq ft @$1,000 per sq
ft $30 million
100,000 sq ft @ $1,000 per sq ft
Total Scheme costs
*On-costs refer to the associated, intangible development costs such as
stamp duty on the purchase of the site, professional fees
(these include attorneys’, architects’, project manager,
quantity surveyors’ and engineers’) and insurances. Finance
is not included here.
If the scheme is wholly financed by an eight per cent facility to be
repaid over a 15-year term, this would require monthly
payments of the order of $1,080,000. If we assume that the
building has 85,000 sq ft of rentable space, that implies a
monthly rent per sq ft of $12.70.
This is an optimistic estimate since it does not take account of:
The cost of providing the carparking such an office would
require (about 150 spaces).
These are significantly understated since we have reliable
information as to higher costs for both land and
construction of these buildings. If costs keep escalating,
the break-even rents also keep rising, all other things
The interest rate used in the example is low and would
likely exceed ten per cent in open market terms. Such an
increase would raise the break-even rent to about $16 per sq
Last week we ended on the juxtaposition of rising construction costs
with a likely oversupply of first-class offices. What are the
probable consequences of that on our capital’s office market?
If we examine the basic example set out in the sidebar, we can see
the break-even rents which a developer would have to charge to make
the lender’s repayments. Please note that this does not allow for
any profit which is only possible if rents above those figures are
Some points to
note here are:
The developers of these buildings have to make allowances for the
periods when parts of the building are unoccupied. One way of
managing that risk is to enter agreements for lease with a single
company for the entire building, but those cannot completely
eliminate the risk, as we see below.
2. Renegotiation of contracts/oversupply of offices
All the signs point to an oversupply of offices in our capital. If
that happened, it is reasonable to expect that occupiers would then
hold the upper hand in rental negotiations.
In that case, there could be attempts to reduce rents by even those
occupiers who have already signed leases. If there is a situation in
the market of more supply than demand, developers could be forced to
consider accepting lower rents than they had bargained for.
thought arising from last week’s column is that Nicholas Tower was
completed more than three years ago but there is still space
available at about $10 per sq ft. As set out here, the new office
buildings will all have break-even rents in excess of $13 per sq ft.
Given that background, how realistic is it to expect that office
rental levels can be maintained when the new buildings, comprising
50 per cent of the present supply, are completed?
3. Opportunities to redevelop
If the scenario we are sketching is true, there will be serious
challenges for those who have invested in these new office
buildings. That would have to include the taxpayer but that is for
the final one in this series. The point being advanced here is that
a market in such a state of flux as is being suggested is also a
place of opportunity. By that we mean the potential for alternate
uses for those office buildings which are no longer in demand as
offices. The decisive question here is whether there can be a
fruitful collaboration between property owners, planning authorities
and lenders to seed the necessary changes.
An assumption stated in the sidebar is that all other things would
remain equal but—although it is a common and understandable academic
benchmark—reality can be much different. To give just one example,
in light of the emerging risks, prudent lenders may start taking
steps to reduce their exposure to this market. These might include a
moratorium on further lending for new projects, swifter
implementation of penalty clauses in loan agreements or increased
interest rates to existing borrowers.
Another aspect of this situation is that most of the space is being
built by owner-occupiers such as the State, RBTT and CMMB. They are
not therefore directly exposed to the perils of falling rents since
they are not looking for tenants but, in economic terms, they have a
distinct exposure. That exposure stems from the possibility that the
break-even rents on their new buildings could be greater than the
cost of continuing to rent for a significant period.
If that did happen, it would mean that it would have been cheaper to
keep their money in the bank and just rent from someone else.
This is all unplanned activity. Yes, we are charging that this wave
of development was, in fact, unleashed without proper planning and
consultation. Once again, it seems that money is no problem for us.
The potent question, in a time when we feel that we can do more than
ever, has to be: how can we do better?
am sure that every project listed has all the required approvals,
but that is the very point. Should our development control
authorities be allowed to approve such colossal changes without the
framework of a strategic plan or any public consultation?
Next week, we conclude this analysis by asking what lessons
can be learned from all this.
Afra Raymond is a director of Raymond & Pierre Ltd.
Feedback can be sent to email@example.com.