More retail and hospitality space being converted to office use

Cinemas are also being used for power naps, nightclubs as dining spots and lunch venues as dance studios

Fri, Sep 04, 2020

Lee Meixian

https://www.businesstimes.com.sg/rea...-to-office-use

THE blurring of lines between property asset classes to optimise the use of real estate will become more commonplace, especially for retail and hospitality landlords whose properties face steep challenges because of Covid-19.

Property consultants expect more owners of retail properties to obtain planning permission from the authorities to convert part of their premises to office use, amid the lower footfall and sales faced by retail operators.

An Urban Redevelopment Authority (URA) spokesperson said that instant approval can be granted for office proposals in most commercial developments under the Change of Use Lodgment scheme, so long as they are not on the first storey where activity-generating uses - such as food and beverage (F&B) - are required.

Even before Covid-19 struck, the retail sector was already facing structural challenges. Consultants said retail landlords had therefore introduced coworking spaces - a move that simultaneously provided footfall for their shops and F&B outlets.

Coworking operator Justco, for example, has taken up substantial space in retail buildings such as Frasers Commercial Trust's China Square Central retail podium (now known as Cross Street Exchange) and UOL's Marina Square. Justco has another space opening at Fraser & Neave's Centrepoint in the fourth quarter of this year.

Last year, coworking operator Spaces, owned by IWG (formerly Regus), opened at OUE Commercial Reit's One Raffles Place Shopping Mall, taking up more than 35,000 sq ft across a few levels at the six-storey retail podium in Raffles Place.

When queried, URA did not provide statistics for the various change-of-use applications.

But Desmond Sim, head of research for South-east Asia at consultancy CBRE, said that because office and retail both qualify for "Commercial" zoning according to URA guidelines, converting use from one to the other is common and, rent-wise, makes sense.

"For a shopping mall, rents on the ground floor are, say, S$30 psf per month. By right, second-floor rents are half or one third of that. By the time you hit the fourth or fifth floor, the rental of a retail space is the same as an office space... The upper floors are more challenging to market."

Other real estate conversions have included the use of movie theatres for power naps, nightclubs as dining spots, and lunch venues as bars or night-time dance studios.

Christine Li, Cushman & Wakefield's head of business development services for Singapore and South-east Asia, called such initiatives a "clever use" of space. "Given the high premium that's attached to Singapore real estate... any optimisation... is more than welcome."

Ethan Hsu, head of retail at Knight Frank Singapore, believes that in future, retail landlords may need to accommodate fulfilment and logistical functions - functions that are typically housed in industrial spaces.

"The deep structural shifts that we are seeing in the retail and commercial sectors will create opportunities for us to rethink how real estate is currently being used, and move towards a new state that can enable trade sectors to stay resilient and profitable," he said.

Meanwhile, in the hospitality space, hotelier and serviced residence operator The Ascott has just launched a "work-in-residence" initiative to transform some of its apartments worldwide into work suites for use during the day.

Those seeking alternative locations from which to work or study can choose from daily, weekly or monthly packages, with rates depending on the length of use and location. In Singapore, rates start at S$70++ per day at lyf Funan Singapore, with day-use hours from 9am to 7pm.

Ascott is also offering its space to multinational corporations, entrepreneurs and small and medium-sized enterprises for uses such as hosting cloud kitchens, Starbucks coffee kiosks, live-streaming or fitness activities.

Ervin Yeo, Ascott's South-east Asia managing director, said lyf Funan Singapore has obtained the necessary licences from the Hotel Licensing Board. "Many of our corporate guests are already using our serviced residences to telework when they stay with us due to the conducive, spacious and self-contained apartments. Work-in-residence is a further enhancement and extension of our current serviced residence usage."

Some consultants think that hotels suffering from a dearth of tourists may also consider conversions to serviced apartments so as to lock in longer-stay dwellers, although there have been no cases of conversion last and this year.

Govinda Singh, executive director of hotels at Colliers International, said that even before Covid-19, hotels had been offering longer stays and serviced apartments shorter stays "to optimise their real estate". "This trend may well be accelerated in the near term, with hotels possibly looking to reconfigure rooms to accommodate more longer-term guests, given the relative resilience of this sector over recent months," he added.

URA said that hotel operators who wish to offer long-term stays can do so without getting planning permission. But they will need to adhere to URA's guidelines as well as comply with other agencies' requirements for serviced apartments, such as those relating to car parking and fire safety.

In general, consultants said, developers stipulate the uses of their sites early on. If a hotel site is sold with the stipulation that 100 per cent is to be designated for hotel use, for instance, the landlord would typically need permission for a change of use. Some sites may allow a range of uses, although URA will usually still stipulate a minimum component of a specific use to meet its planning intentions.

"But there is nothing to prevent the hotel landlord from leasing out hotel rooms on a long-term basis of several months, similar to serviced apartments," said Ms Li of Cushman & Wakefield.

Consultants said that most repurposing of real estate is relatively easy to accommodate, subject to adherence to the right safety regulations or lease terms.

"Landlords need to be accommodative in structuring the leases. If they know that the tenant is paying one rental for two uses of the same venue, they may charge a slightly higher percentage on turnover, since the tenant's income would inevitably be higher," added Ms Li.

Developers and landlords will also have to convince their investors that a mixed-use approach is the right one. Historically, investors have demonstrated a preference for pure-play real estate investments and for certain types of properties over others.

Also, a complete change of use in a development would require completely different asset management expertise. There has been no precedence of a retail asset converting to a pure office asset as yet, but Tricia Song, head of research for Singapore at Colliers, said that office and retail require very different skill sets and client relationships.

"Retail is more management-intensive, as in there is footfall management, marketing campaigns, higher maintenance; and rents typically have a gross turnover rent component. The overall mall tenant mix and leasing management are very dynamic, whereas the office asset class is more homogeneous and less operation-intensive."

Partial conversions would not require such an overhaul, although they would still need a mix of skills.