However, in today's situation, with ample supply in the pipeline in the Central Business District (CBD) and regional hubs, does it make financial sense to carry on bidding for transitional office sites?

Figure 1 shows that initial successful bidders were showing conservatism, but by the fourth transitional site tender, prices were beginning to follow general office rents and prices. Thus far, total development costs for successful bidders for the six sites are manageable under current market conditions. The Table shows that the land price per square foot per gross plot ratio (ppr) ranged from a low of $69 to a high of $242 psf ppr.

Assuming a successful bid of $250 psf ppr, the amortisation factor to recoup the land and construction cost amounts to about $4 psf per month (pm). (Given a low interest rate environment, simple amortisation may suffice.) That would constitute the return of capital. A question now arises: Is this $4 psf a reasonable rate?

To answer that, the rental rates of short term office space provide a guide. Figure 2 shows the average rental rate on an estimated net lettable area (NLA) for the successful bidders of short term commercial buildings leased from the Singapore Land Authority (SLA). These are leased from the SLA on a 3+3+3 year basis.

Presently, the rate is $4.12 psf pm. This is almost comparable to the amortisation rate of a purpose built transitional office with a land price of $250 psf ppr. If one were to factor in the premium payable for a purpose built new transitional office, the rate should be higher than $4.12 psf pm. Add on $0.80 psf pm for maintenance expenses, rents will close in on the $5 mark. Considering a 70 per cent debt level, the interest would add up to about $1.22 psf pm, making the total cost at about $6.10 psf pm.

Although the supply of new and secondary stock is building up due to new developments in the fringe and non-CBD area, they are not cheap to develop. The average cost of developing the upcoming buildings range from $1,200-1,500 psf of NLA. Assuming an economic life of 50 years and taking $1,350 psf as the mid-point, the monthly amortisation works out to $2.25 psf NLA.

While the amortisation is significantly lower than that for transitional offices, 99-year or leasehold offices have a high absolute level of debt, by virtue of the much higher land cost. If the loan to value ratio is 70 per cent and assuming an interest rate of 3.5 per cent per annum, the interest expense is about $2.75 psf pm. In total, if maintenance is estimated at $1 psf pm, the base rental to cover amortisation, interest and maintenance is therefore also around $6 psf pm.

In other words, bidders for a transitional office site at $250 psf ppr and for a 99-year leasehold site at $900 psf ppr are indifferent because the break-even rental to cover return of capital, interest expenses and maintenance is about the same at $6 psf pm.

The highest transitional office bid was $242 psf ppr by UOB Kay Hian. For them, it would make economic sense because rentals for UOB Plaza, where they were previously located, are going for much more than their cost of being located at Anthony Road. Rising rentals in 2007, image, the need for a large space to accommodate their front and back offices and easy access by public transport made their choice to bid for a transitional office space near Newton MRT Station a good compromise.

For the six URA sites that were sold for transitional offices, three had anchor tenants. The other three were leased to multiple tenants. From observation, those that had anchor tenants bid above $219 psf ppr while those which won the site with bids less than $173 psf ppr leased out to multiple tenants.

In the final analysis, some points can be made about transitional offices here.