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.
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
"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
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
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
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
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,"
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
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. -