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News Release


Build-to-suit: An Emerging Niche Market in Bangkok's Office Sector

As a number of large corporations prefer having their own office facility to leasing or sub-leasing space in an office building, developers now have the opportunity to offer a build-to-suit lease option. This option allows the tenant to design a new facility that meets its requirements without the need to build and own the premises, and at the same time, ensures a steady income stream for the developer, according to Jones Lang LaSalle, a professional services firm specialising in real estate.
Mr. Michael Tang, Head of Project and Development Services at Jones Lang LaSalle, said, ‘While smaller companies have no choice but to lease or sub-lease space in a ready-built office building, larger companies have more options to satisfy their corporate real estate requirements. They could acquire and renovate an existing building, build their own facility or lease a build-to-suit facility.’
‘In many countries around Asia such as Singapore, China, India, Malaysia and Indonesia, we have witnessed an increasing number of multinational companies going for the build-to-suit lease option. We have also seen this trend emerging in Thailand. This represents interesting opportunities for developers to offer a build-to-suit lease option to large companies here,’ said Mr. Tang.
In a build-to-suit lease arrangement, a developer offers to construct a building as specified by a potential tenant, and then lease the building (and the land) to the tenant. This means the tenant is allowed to design and customise a new facility to meet its corporate requirements including image, security, infrastructure and workplace strategy without the large up-front capital expenditure that comes with building and owning a property. Under this structure, the tenant pays the lease and the operating expense, without owning the facility.
Tenant’s benefits
The build-to-suit lease offers several advantages to corporates whose current space no longer meets their objective. It allows the tenant to choose the optimal location, preferred corporate identity, exclusivity and maximum space efficiency since the facility is designed specifically for the tenant. The new construction also provides the tenant an opportunity to specify and incorporate the latest cost-effective energy-saving systems and state-of-the-art technologies and construction materials with the goal of operating efficiently.
‘Although build-to-suits are generally considered more expensive than leasing existing space, particularly in a highly competitive office market like Bangkok, this could be offset in the long term by savings in space efficiency, reduced operating costs and improved company image. In addition, a build-to-suit arrangement is not a short-term occupancy solution, but a long-term lease commitment, which can last for as long as 12–15 years. As real estate markets are inherently cyclical, the long-term lease will help ensure that the tenant will not face a dramatic rise in occupancy costs once the office market fully recovers,’ noted Mr. Tang.
Developer’s opportunity
Mr. Umpon Thepnumsommanus, a director of investment at Jones Lang LaSalle, said, ‘Build-to-suits could represent a very attractive business opportunity for developers looking for a more secure income stream in the long term. While returns on real estate investment vary upon many factors, a well-studied and well-planned build-to-suit project could offer attractive returns to seasoned developers.’
However, like any other investment assets, a build-to-suit project requires a comprehensive feasibility study in order for the developer to maximise ROI and minimise risks.
‘First and foremost, the tenant’s financial strength and business potential must be analysed and assessed thoroughly to make sure that the tenant can fulfil its financial commitments throughout the lease term. In addition, the tenant’s creditworthiness must be acceptable to the lenders in order for the developer to obtain favourable financing terms,’ said Mr. Umpon.
While the flexibility that allows the tenant to design and customise the facility to fulfil its real estate requirements is one of the most attractive qualifications of a build-to-suit, certain industry-specific building features required by the tenant may make it difficult for the developer to find a new tenant to take over the facility when it becomes vacant. ‘Some building features that are favourable to one industry or business may be unwanted by another. When setting up rental rates with the tenant, the developer should take this factor into account,’ said Mr. Umpon.
Professionalism: A key to success for a build-to-suit
For most corporates, real estate investment is not the core business and allocating the investment capital to other strategic operating initiatives that offer a higher rate of return on their investment may be a more efficient use of resources. In this regard, a build-to-suit accommodation may be a better option compared to building own facility.
For developers, build-to-suit facilities could be a complicated development project as the design will be based on a particular tenant’s specific requirements.
Mr. Tang said, ‘The development of the build-to-suit leasing alternative is normally a lengthy process that could take several years to complete as it involves many processes from due diligence study, site search, negotiation, design and construction to fit-out. Ultimately, its success will depend largely on how the project is managed to meet the tenant's and the developer’s expectations.’