Ageing buildings in the CBD get a lifeline

/ EdgeProp Singapore |
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The new URA Draft Master Plan 2019 offers incentive schemes to spur rejuvenation in the city and increase mixed-use components. However, there are challenges in the short term

Owners of ageing commercial and mixed-use developments in the CBD received a shot in the arm with the Draft Master Plan 2019 unveiled on March 27. This is because it came with two new schemes, namely the CBD Incentive Scheme and the Strategic Development Incentive Scheme.
Moray Armstrong, CBRE Singapore managing director, describes these schemes as the “SkillsFuture” scheme for the CBD. “The old stretches of Shenton Way and Cecil Street have greatly contributed to Singapore’s growth as the pioneer CBD,” he notes. “The emergence of the new economy and Downtown CBD has resulted in these sub-markets being less favoured and to some, even being functionally obsolete. The two schemes allow for the existing developments to extend their use beyond office operation hours.”
These schemes are “long-term plans deemed to provide a lifeline to ageing developments”, adds Armstrong. “The incentive of a higher plot ratio is to promote private sector-led urban regeneration in the middle to long term. However, any knee-jerk reaction will be curbed by the strict qualification rules behind each scheme as well as market sentiments.”
The Central area of Singapore where the URA Master Plan 2019 included the CBD Incentive Scheme and Strategic Development Scheme (Credit: Samuel Isaac Chua/EdgeProp Singapore)

Higher plot ratios

Areas earmarked for rejuvenation under the new CBD Incentive Scheme are those in the Anson Road, Cecil Street, Robinson Road, Shenton Way and Tanjong Pagar areas.
To qualify for the CBD rejuvenation scheme, buildings have to be at least 20 years old from the last date of Temporary Occupation Permit (TOP) and where the existing use is predominantly office. There’s also a minimum plot size of 1,000 sqm for some areas, and 2,000 sqm for others. For a site in the Anson Road and Cecil Street area to be redeveloped for hotel use, or mixeduse development with residential and commercial components, the uplift in gross plot ratio is 25%. For residential use with commercial space on the first level, the new development will enjoy an increase in plot ratio of up to 30%.
This CBD Incentive Scheme will be trialled for a five-year period – the duration of the Master Plan 2019. The rationale for the incentives is to encourage the conversion of existing, older, office developments into mixed-use developments that will help rejuvenate the CBD.
The Cecil Street (pictured), Robinson Road, Shenton Way, Anson Road and Tanjong Pagar areas are those earmarked for the CBD Incentive Scheme (Credit: Albert Chua/EdgeProp Singapore)

Biggest Beneficiaries?

CBRE’s Armstrong estimates that there are about 20 developments in the CBD that could qualify for the CBD Incentive Scheme. “These buildings’ owners will be motivated to explore the possibilities of triggering the bonus plot ratio or to put up their properties for sale with a bonus plot ratio scheme,” he says. “However, the new use will need to be either hotel or residential, and remains marred by measures and a looming supply in the next few years. In addition, these buildings still currently enjoy relatively high occupancies, limiting the need for any huge capital expenditure and revenue downtime for redevelopment.”
Of the three areas earmarked for rejuvenation within the CBD, Steven Ming, managing director of Sakal Real Estate Partners -- a real estate investment advisory and brokerage practice -- is of the view that those around Anson Road are the biggest beneficiaries of the schemes. “This is because the minimum threshold for plot size is lower, at 1,000 sqm,” he explains. “Many of the buildings are already of this size and the building owners could benefit from land intensification independently.”
The Cecil Street, Robinson Road, Shenton Way and Tanjong Pagar areas have a higher threshold in terms of site area – minimum of 1,000 sqm for corner plots and 2,000 sqm for the others – and hence, pose some challenges for owners. A number of them are sitting on relatively small sites of less than 2,000 sqm and that will mean having to amalgamate with a neighbouring site to enjoy the uplift in gross plot ratio, adds Ming. “The biggest challenge will be for owners of adjacent sites to agree on a valuation for two adjoining sites of different lease tenures, especially if one is 99-year, while the other is 999-year or freehold.”
Sector 16, which is the CBD area including Cantonment Road, Chinatown area, McCallum Street and Tanjong Pagar, saw hotel DC rates for hotel use hit $15,400 psm ($1,431 psf) compared to commercial use, which stands at $12,250 psm ($1,138 psf) and $9,900 psm for non-landed residential use (Credit: Albert Chua/EdgeProp Singapore)
Ming sees the anticipated benefits from increased plot ratio for redevelopment into residential, mixed-use or hotel use under the CBD Incentive Scheme “negated” for now by the higher development charge rates, especially for conversion to hotel use.
The latest revision of development charge (DC) rates for the six-month period from March to Aug 31, 2019, saw a hike of 45.6% on average for conversion of buildings to hotel use. Meanwhile, for conversion to commercial use, the average increase in DC rates is 9.8% over the same period. This means that in Sector 16, which is the CBD area including Cantonment Road, Chinatown area, McCallum Street and Tanjong Pagar, the DC rate for hotel use is $15,400 psm ($1,431 psf) compared to redevelopment for commercial use, which is $12,250 psm ($1,138 psf) and for non-landed residential use, $9,800 psm ($910 psf).
“In the near-term, the immediate beneficiaries are likely to be single-asset owners on pocket sites who undertake the redevelopment of their own buildings,” says Shaun Poh, Cushman & Wakefield (C&W) executive director of capital markets.
Realty Centre, where 80% of the owners have agreed to a lower reserve price of $148 million ($2,441 psf ppr) for a collective sale for redevelopment into a new commercial project (Credit: Cushman & Wakefield)

Commercial collective sale hopefuls

However, owners of strata-titled, ageing commercial buildings see the schemes as an opportunity “to cash out on their investments”, says CBRE’s Armstrong. “However, there are still some challenges to be overcome, such as smaller older buildings that may fail the requirements for the land size.”
At Realty Centre on Enggor Street, a commercial building built in 1974, strata-titled owners were “very excited” when the new CBD Incentive Scheme was rolled out, says C&W’s Poh. The existing building, which is predominantly for office use, sits on a site area of 1,021.9 sq m (about 11,000 sq ft). It is located within the Anson area, and therefore, will benefit from the uplift in GPR from redevelopment into residential, mixed-use with residential or hotel use.
C&W is the marketing agency for Realty Centre, which was launched for collective sale in January. As it was before the Draft Master Plan 2019 was unveiled, the redevelopment potential was based on the 2014 Master Plan. It was therefore zoned for commercial use with a maximum height of 35 storeys, and approved for a new commercial development with a plot ratio of 5.396 and gross floor area (GFA) of 59,355 sq ft.
Shenton Way where many of the old buildings have been redeveloped over the years (Credit: Albert Chua/EdgeProp Singapore)
The asking price of Realty Centre was $165 million then, which worked out to a land rate of $2,714 psf per plot ratio (psf ppr), inclusive of an estimated development charge of $2.188 million. The tender closed on Feb 21. “There was a price gap when we put it up for collective sale and we’re trying to bridge that gap,” says Poh.
There has been renewed interest from potential buyers since the Master Plan 2019 was announced, concedes Poh. A lot of the interest for Realty Centre has come from corporate and business owners looking to redevelop the building for their own use, he adds. Early this month, C&W obtained a new mandate to lower the reserve price to $148 million, and has obtained agreement from 80% of the owners of Realty Centre to do so. The land rate therefore has been adjusted to $2,441 psf ppr, inclusive of the DC rate of $2.334 million for commercial redevelopment.

'Window of opportunity'

The strata-titled owners of Realty Centre are not the only collective sale hopefuls who see the upside in plot ratio as a bonus, and therefore, reckon they could command a higher price. There are others who are also exploring the possibility of a collective sale.
A strata-titled mixed-use development, International Plaza, built in 1970, is said to be exploring a collective sale (Credit: Samuel Isaac Chua/EdgeProp Singapore)
As consultants, we need to manage these expectations,” says Ong Choon Fah, CEO of Edmund Tie & Co (ET&Co). “En bloc is not something that can happen overnight. Some of the owners use their commercial units as their place of business, and therefore, it goes beyond real estate. So, it is more difficult to persuade them to sell.”
Word on the street is that the owners of International Plaza on Anson Road, a mixed-use, strata-titled development built in 1970, have appointed a property consultant to advise them on the collective sale process. Given its location on Anson Road, they are also likely to benefit from the CBD Incentive Scheme for the Robinson Road, Shenton Way and Tanjong Pagar neighbourhood.
Along Shenton Way, Shenton House is said to have made a third attempt at a collective sale in late 2018. The strata-titled owners in the mixed-use development are in the midst of securing 80% consensus for a collective sale. Strata-titled, mixed-use developments in the CBD built in the late 1960s and early 1970s included Shenton House and International Plaza. “In the old days, even the carpark is a strata-titled lot,” says ET&Co’s Ong. “Apportionment of proceeds that is acceptable to all the owners of a mixed-use development – where shops, offices, residential units and carpark space have different share values -- is always very tricky.”
One Shenton (left) is a redevelopment of the former Robina House, while at Shenton House, built in 1969, strata-titled owners of the mixed-use development recently made its third collective sale attempt late last year (Credit: Albert Chua/EdgeProp Singapore)
Norman Ho, deputy director of corporate real estate at law firm Rajah & Tann, has also been fielding inquiries from building owners due to the CBD Incentive Scheme. “Owners of such buildings are also asking for very high prices and such sites will also attract high DC rates.” No doubt, “elevator chats” among the owners of strata-titled commercial and mixed-use developments in the CBD will heighten, says Sakal’s Ming. “Some might see this as a rare window of opportunity to secure a better price for their property.”

Mixed-use Disrict

URA’s overarching aim to reposition the CBD as “a 24/7 mixed-use district so that the CBD will not only be a place to work, but also a vibrant place to live and play”, is not new, say property consultants.
“The government has been encouraging inner city living and mixed-use development with both commercial and residential components since the late 1960s and early 1970s, when the government first launched the government land sales (GLS) programme in the CBD,” recounts Tan Tiong Cheng, senior advisor of Knight Frank Asia Pacific.
The former Shing Kwang House and an adjacent building at Shenton Way were redeveloped into the present-day SGX Centre (Credit: Samuel Isaac Chua/EdgeProp Singapore)
One of the first such buildings was the former Robina House developed by the late Robin SK Loh, an Indonesian-born Singaporean businessman and real estate developer. Loh’s penthouse at Robina House was “the only one that came with its own bowling alley”, relates Tan.
Robina House has since been redeveloped into One Shenton, a 341-unit, twin tower condo development by City Developments and completed in 2011.
Meanwhile, another tycoon, SP Tao, the founder of Shing Kwan Group, whose businesses include commodities, real estate and shipping, had his penthouse at the former Shing Kwang House at Shenton Way. It was redeveloped together with the adjacent building into the present-day SGX Centre.

To redevelop or not to redevelop?

It was around 2005-2010 that there was a spate of redevelopment and conversion of old office buildings to residential towers. For instance, the former VTB Building on Robinson Road has been redeveloped into the new Robinson Suites; the former HMC Building on Mistri Road has been turned into Lumiere; while 76 Shenton is a redevelopment of the former Hong Leong House.
The former HMC Building has been redeveloped into Lumiere, a residential tower with commercial units on the first level (Credit: Albert Chua/EdgeProp Singapore)
Meanwhile, EON Shenton, a mixed-use scheme with strata commercial space and residential units, is a redevelopment of the former Marina House. UIC Building was also redeveloped into a new 23-storey office block of the same name and a new 54-storey residential tower with 510 units called V on Shenton.
In 2011, there were some applications for office buildings to be converted to residential development that were turned down by the URA. These included Cecil Court on Cecil Street and Fuji Xerox Towers.
There were also some buildings where applications for conversion from commercial to residential use were approved by URA, but where the owners did not proceed. These included the former Chow House, which has since been redeveloped into the new commercial building, Crowne at Robinson, and two adjoining office blocks at 137 and 139 Cecil Street, formerly known as Aviva Building and Cecil House respectively. The buildings have changed hands several times over the past decade.
The 16-storey commercial building at 139 Cecil Street (right) is on the market for $218 million (Credit: Albert Chua/EdgeProp Singapore)
In 2010, SE Cheong, the previous owner of both 137 and 139 Cecil Street, had secured provisional permission from URA to redevelop the two office blocks into a new residential project with 227 apartments. However, he did not proceed with redevelopment.
The office building at 137 Cecil Street is now owned by the Zhou family of Shanghai Hengda Group, which therefore renamed it Hengda Building. Meanwhile, 139 Cecil Street has been put on the market by the owner, a joint venture between Vibrant Group and DB2 Group. The asking price of the building is $218 million, and is jointly marketed by JLL and CBRE.
The former 11-storey building at 139 Cecil Street has been extensively refurbished and is now a new 16-storey office building with a restaurant on the first level and a roof terrace with swimming pool on the topmost level. The building is 100% leased to a Hong Kong co-working operator Campfire, which will take up a total area of 85,000 sq ft when the building is completed sometime in 3Q2019.
The prevailing concern is the dearth of new office supply over the next two to three years, which is putting pressure on office rents.(Credit: Samuel Isaac Chua/EdgeProp Singapore)

Office still the flavour of the month

“With major changes in demographics and lifestyles, URA’s efforts to bring more life in the CBD is encouraging,” says Knight Frank’s Tan. “It is in the right direction although at the moment, the office market is the hottest sector.”
In fact, the prevailing concern is the dearth of new office supply over the next two to three years, which is putting pressure on office rents.
According to CBRE Research, Grade-A Core CBD monthly office rents in 1Q2019 grew 3.2% q-o-q to $11.15 psf. This marks the seventh consecutive quarter of rent growth, bringing rents to 24.6% higher than the last trough back in 2017.
“A small but growing number of corporates have been exploring enterprise solutions offered by co-working providers,” says CBRE’s Armstrong. “However, it’s still early days and we do not see a significant threat to traditional office demand at this point.”
What the draft Master Plan 2019 has done, however, is to put a certain basket of properties in the spotlight, says Armstrong. ET&Co’s Ong agrees. “It’s clear that the URA master plan is not intended to be for the short-term,” she adds. “It is a rejuvenation process that will evolve over time to avoid an office crunch.”

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