Make-over for office buildings
A recent study by Jones Lang LaSalle shows refurbishment is to be completed this year in three old office buildings in central Bangkok with a combined 63,000 square metres of space. More are expected to start renovation by year-end.
"Over the past few years, we have seen an increasing number of old 'secondary-grade' office buildings being renovated. These include renovations by owners and investors who had recently purchased the buildings," said Suphin Mechuchep, managing director of the company's Bangkok office.Renovation is a return-maximising strategy that owners of older buildings can use in current market conditions. With healthy ongoing levels of occupier demand and a lack of new "grade-A" building pushing up rental rates, landlords with well-located buildings may refurbish and re-release their buildings as re-branded properties to the market to boost competitiveness and maximise rentals, she added. Another company executive, Caroline Murphy, said companies with office leases that are about to expire may be "astonished" at the rental rates landlords are demanding when negotiating lease renewal in such buildings. While the typical office lease in Bangkok is three years, the average office rental has increased by more than 50 per cent over the past three years. Those occupying space in grade-A buildings in the central business district (CBD) area may suffer more, as rentals are much higher than for secondary-grade buildings. There is no doubt that an increasing number of companies are looking at new grade-A buildings in fringe locations or secondary-grade buildings in the CBD as alternatives to avoid higher occupancy cost, Murphy said. According to Jones Lang LaSalle, rental rates of grade-A office space in the CBD area are averaging Bt650 per sq metre per month, representing a 55-per-cent increase from Bt420 in 2003. The secondary-grade segment in the same area has seen a lower average rental of Bt450, but also witnessed a high increase compared to Bt310 in 2003. After renovation, some secondary buildings in well-located areas could fetch significant rental growth rates ranging from 20 per cent to 30 per cent, depending on the quality of renovation. However, the new rentals would still be very competitive compared to grade-A buildings in the same area and allow an attractive investment return from refurbishment, said Murphy. Renovation could also be a sound approach for investors looking to invest in the Bangkok office market, where grade-A buildings available for sale are limited, according to Suphin. Instead of looking for a grade-A building or developing a new project, some investors may look at the secondary-grade market. High construction costs and the new Bangkok town plan - with limits on land set back, floor area ratio and open space ratio that restrict maximising site usage to former levels - are among the major factors that could make renovation and upgrading a favourable option, she said.
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