Making housing a priority in Sydney

January 28th, 2015 by Emil Roue

The NSW Department of Planning and Environment has recently published ‘A Plan for Growing Sydney,’ which provides the overarching strategy for accommodating Sydney’s future growth over the period to 2031.

According to their projections, the population of Greater Sydney is expected to grow from 4.4 million (as at the 2011 Census) to 5.9 million by 2031, resulting in an additional 664,000 new homes being required. This equates to an average of 33,200 new dwellings each year, which represents a significant uplift upon current levels of construction. According to data released by the Metropolitan Development Program, net dwelling completions across Greater Sydney averaged only 17,900 over the course of the last five financial years.

Unsurprisingly, given the challenge that Sydney faces, housing features heavily in the new Metropolitan Plan. Clear goals are established in respect to increasing housing supply and ensuring sufficient housing diversity to suit different household types and budgets.

There are already a number of initiatives in place by which the State Government aims to ensure that future residential development complies with their vision, a key feature of which relates to a greater preference for higher density housing. This is particularly true of the ‘Priority Precincts’ scheme which promotes in-fill development in existing urban areas that are selected for their proximity to employment centres and existing or proposed public transport infrastructure.

Eight precincts were announced in March 2013, the master plans for which have since been subject to community consultation. Amendments to the Local Environment Plans (LEPS) have been endorsed by the Planning Minister in respect of the North Ryde, Epping Town Centre and Wentworth Point precincts, which have the capacity to provide a total of 9,000 dwellings. In 2014, a further five precincts were announced, three of which are located around proposed stations on the new North West rail link, which is due to start operating by 2019.

Housing also features heavily amongst the State Government’s major urban transformation projects. These consist of large-scale, long term regeneration schemes. Currently, there are six projects including those at Central Station to Eveleigh (inner South), Green Square (inner south), Bays Precinct (inner west) and Parramatta Road (west central). These mixed use renewal areas have the potential to provide a significant uplift in housing as well an expanded commercial, retail and leisure offering.

In addition to the above, the Plan reaffirms the role of the existing South-west and North-west Growth Centres in accelerating housing supply. A significant proportion of development in these outer Sydney ring areas is likely to be on ‘greenfield’ sites. Greenfield development currently makes up a quarter of Sydney’s housing growth. This trend is set to continue with dwelling projections indicating that construction activity over the next 20 years will be highest in the outlying municipalities of Blacktown, Camden and Liverpool.

As evident from the above, these initiatives will all play an important role in helping to address Sydney’s future housing requirements. JLL will be closely monitoring their progress and will publish further updates throughout the course of 2015.

About the author
Emil Roue is a Research Analyst for JLL, based in Sydney, Australia.

Stepping up their game: a new breed of Chinese property investor

January 27th, 2015 by Daniel Odette

Media reports in 2014 were awash with stories of Chinese investors buying up trophy assets in global markets such as New York and London. While these stories took centre stage, another important trend has been unfolding behind the scenes in China. During 2014, we also witnessed the emergence of many new sophisticated Chinese investors buying commercial assets within China. These investors are not owner occupiers which historically were a major market driver in China, and they have built up strong investment teams dedicated to understanding the local market and achieving strong returns. I have profiled below three major groups of domestic players that I have observed making significant progress over the past year:

 

  1. Domestic Insurance Firms: For years we have been expecting a huge flow of funds from the insurance industry to dramatically change the market in China. This process has been much slower than many initially thought, however, as insurance firms needed to first build up their real estate teams and the government has effectively limited their buying options with a yield requirement for all commercial assets of approximately 7%. While this yield limit remains in place, many insurance companies now have large real estate investment teams and are finding creative ways to put capital to work in China. This has included investments at the corporate level with developers, investments in higher yield sectors like logistics, and finding acquisitions with a guaranteed yield from the seller.
  2. Chinese Private Equity Funds: The dominant private equity real estate investors in China have long been large international and regional players like Blackstone or ARA. Over the past year, many more locally-raised, RMB-denominated private equity funds have been raised and have entered into major commercial transactions in China’s key markets. Many of these funds are raising money from wealthy individuals that are looking for alternatives to the residential market and as a result we are seeing more capital funnelled into the commercial sector. So far, these local funds have displayed a fairly sophisticated approach and are focusing primarily on the Tier 1 office markets of Shanghai and Beijing. For example, Gopher Asset Management made a major investment in the Shanghai Office sector, buying Suntown Plaza for RMB 3.1 billion in Q4.
  3. Government-Backed Property Companies: Finally, last year several government-related property firms became involved in commercial asset transactions. These firms traditionally preferred to buy land to develop, but now that land is scarce and expensive in big cities, they are branching out to existing assets.

All in all, the emergence of these types of sophisticated and well-funded local investors is a sign of the maturation of China’s investment market. Moving forward, I expect that domestic property investors will remain key players in China’s commercial real estate investment market. Indeed in 2014, domestic buyers represented 76% of total commercial transactions, the largest share since the aftermath of the GFC in 2009.

Figure: Commercial Investment in China by Purchaser Source of Capital

Source: JLL Research

About the author
Daniel Odette is the Senior Manager in JLL’s Research team in China, based in Shanghai.

Should we hunt for that elusive alpha in the Philippine property investment market?

January 22nd, 2015 by Claro Cordero Jr.

The term ‘alpha’ in investment often refers to the measure of excess return earned by the fund and is arguably a reflection of the underlying fund manager’s investment skill. When applied to property investment, the hunt for the elusive alpha actually boils down to the efficient allocation of portfolio investments among outperforming sub-sectors or geographies.

Often, however, the search for the alpha becomes more complicated, as there are other property related factors, such as property management, marketing strategy and best-in-class property valuation, which also affect the return on the physical asset. To outperform the market, the fund manager needs to have a good forecasting capability backed with high quality market research and professional valuation advice. Further, the fund manager should have access to good quality property and asset management to enhance and drive the marketing strategy and ensure a steady, protected stream of income for the portfolio.


High-quality grade developments in Makati CBD, Philippines’ premier financial district

Market outperformance is also normally achieved through diversification of investment across geography and property sub-sectors. Such is the appropriate strategy for highly diversified markets such as the Philippines, to ensure efficient allocation and maximisation of investment return for any given level of risk. The recent growth in the offshoring and outsourcing industry, remittances from overseas Filipinos and increasing tourism potential have supported the demand for retail, residential and commercial assets, which supported the creation of a highly diversified portfolio consisting of investment quality mixed-use property developments, including master planned communities, across the Philippines.

While there are risks and challenges in the market, there are a number of opportunities that are likely to encourage the growth of property portfolio investments in the Philippines. For one, the long-range forecast of economic growth and development will provide the necessary backdrop for further inclusive growth of the property market. Further, relaxing the rule on foreign ownership and participation in the property market, as well as revising the tax scheme and public flotation ceiling in the REIT regulations, will allow more investments to flow. This will promote more sophisticated assets and more transparent market practices, which will generate more meaningful alpha for highly discerning investors.

About the author
Claro Cordero Jr. is the Head of Research, Consulting & Valuation Advisory Services for JLL in the Philippines.

Singapore auction activity registers uptick as price expectations gap narrows

January 20th, 2015 by Shuyu Sun

Like other mature real estate markets, property auctions in Singapore have evolved into an efficient platform through which owners are able to divest their properties quickly.

The process is straightforward. State land (appointed for sale by the government) and private properties can be auctioned with just the lawyers’ provision of contractual agreements and relevant documents. Typically, land and properties will be marketed one month prior to the actual auction, giving buyers ample time for inspection and consideration.

In the last two years, as the introduction of several rounds of property cooling measures moderately softened the investment sentiment and transaction volume in the Singapore real estate market, the auction segment was hurt with potentially lower sales activities.

The drop in auction sales, however, started to reverse in the second half of 2014 with a significant increase in the total value of successfully auctioned properties. This is partly attributed to the increase in mortgagee sales. Following the implementation of the latest financing framework (Total Debt Service Ratio) in June 2013, the number of mortgagee listings rose from only 28 in 2013 to 150 in 2014.

Also, based on my observation at auctions, compromises on both sellers’ and buyers’ ends have narrowed the price expectation gap, resulting in quicker sales.

From the buyers’ perspective, 1) the anticipation of a potential relaxation of cooling measures alongside 2) the expected rise in interest rates in the immediate horizon could have encouraged these purchases. There are, however, downsides for potential investors. The softer leasing market has resulted in more properties being sold on a vacant possession basis. For instance, 26 of the 32 properties sold at auction in 2014 were on a vacant possession basis.

At the same time, sellers are now more willing to lower price expectations in light of the weaker market conditions. Observations at recent auctions revealed that sellers have become more flexible in terms of pricing, dangling sweeteners, including discounts on opening prices, to entice potential bidders and, in some instances, accepting offers below the reserve price.

If the narrowing of price gap expectations between buyers and sellers at auctions is a bellwether of the sentiment in the larger market, then we should expect increased activity in the real estate market in 2015.

About the author
Shuyu Sun is a Research Analyst for JLL in Singapore.

Transport & Logistics sector targets premium grade facilities in Perth

December 19th, 2014 by Sophie Fletcher

Transport and logistics firms have led the charge for the take up of industrial space in Perth in the last five years. Since 2010, approximately 34% of industrial take-up recorded by JLL has been for transport and logistics occupiers in Perth. In the last 12 months, Mainfreight, Recall, Toll, Kuehne and Nagel and Qube have leased industrial space in Perth, with the Perth Airport and surrounding core eastern suburbs being popular locations for logistics warehouses and distribution centres.

These firms, including third-party-logistics (3PL) providers, have been seen increasing their physical footprint in Perth in recent years, either through the design and construction of purpose built facilities, or expansion into quality, premium grade warehouses.

Given Perth’s remoteness and subsequent high transportation costs, the expansion and establishment of distribution centres in Western Australia (WA) is a step forward for many firms in order to service growing demand from the region. The rise of e-commerce, continued population growth, strength of the Australian dollar, and changes in consumer behaviour have led to increases in online shopping, import volumes and freight levels into Perth. Relative to the rest of Australia, Western Australians spend the highest proportion on online purchases. According to the NAB Online Retail Sales Index, Western Australians spent 16% above the national average. Regional WA has the highest average online spending, 26% above the national average.

This has increased the number of retailers outsourcing to 3PL providers or building their own warehouse and distribution centres in WA. By using a 3PL provider, retailers can focus on their core business, while outsourcing services such as warehousing, inventory management, packaging, transport and freight-forwarding. By outsourcing and/or holding stock in WA, online retailers are able to reduce delivery times and cost, and for the first time are able to offer next day delivery, and reduced delivery time to regional areas.

Whilst the current level of vacant industrial property in Perth is relatively high compared to the past 5 years, only a limited number of prime grade facilities are available that are suitably constructed to be considered by these types of occupiers. As well as being well located near main transport links, 3PL and logistics occupiers typically require warehouses greater than 5,000 sqm, high truss height and clearances, sprinkler systems, container height roller doors and loading docks, large hardstand areas and with suitable truck access. This makes the design and construct of a purpose built facility the preferred option for those without time constraints, particularly when requirements and configurations can vary depending on what type of stock is being warehoused. The majority of existing vacant industrial property in Perth doesn’t have the suitable truss height, ESFR Sprinkler requirements or floor space areas suitable for large scale pallet racking and automated systems necessary for logistics firms.

With solid growth forecasts for the level of international imports for WA, and online retailing showing no signs of slowing, transport and logistics firms look set to continue their growth in WA, and lead the way in the take up of prime grade industrial facilities in Perth.

About the author
Sophie Fletcher is the Research Analyst for JLL, based in Perth, Australia.

Logistics in China’s Pearl River Delta – it’s all about Tier 2 cities

December 17th, 2014 by Silvia Zeng

The non-bonded logistics market is growing rapidly in the Pearl River Delta (PRD). With warehouse supply rising and improvements in the highway network, Tier II cities adjacent to Guangzhou and Shenzhen are emerging to support regional distribution centres for the PRD.

Previously, most FMCG, e-commerce, electronics, auto, and logistics companies preferred to establish regional distribution centres in Guangzhou, taking advantage of proximity to the region’s largest retail market, key transportation nodes, and the largest amount of high-quality warehouses in the PRD. However, a shortage of government land tender sales for logistics usage has restricted the supply of warehouse space in core locations. Although there will be ample supply in non-core areas in both Guangzhou and Shenzhen, some distribution centres have expanded in core locations of Tier II cities, most of which border Guangzhou or Shenzhen and connect via key expressways running through the PRD. Some notable regional distribution hubs in Tier II cities include Park n Shop and VIP.com in Foshan; JD and yhd.com in Dongguan, the latter three being large Chinese online retailers.

This trend is facilitated by infrastructure improvements across the PRD. Expressway network density has risen by 50% since 2008 and should increase by a further 38% by 2020. We believe key expressway plans will further improve efficiency and connectivity for product delivery from Tier II cities which will offset the higher transportation costs from those distribution hubs outside of Guangzhou. These plans include links such as:

  • Zhaoqing – Guangzhou (Huadu)
  • Guangzhou (Panyu) – Foshan (Gaoming)
  • Shenzhen – Dongguan
  • Many investors have already made a foray into these Tier II city hotspots. In 2008, total GFA of prime non-bonded warehouse facilities in Guangzhou, Shenzhen, Foshan, Dongguan and Huizhou only amounted to 1.1 million sqm. The total stock has increased nearly fourfold to 4.1 million sqm in 2014, and will climb to 8.0 million sqm by 2017. It is also worth noting that 68% of the future supply increment – 2.6 million sqm – will be situated in Tier II cities.

    The picture below maps the existing and upcoming non-bonded warehouse projects developed by GLP, Prologis and Goodman. It shows their developments in Tier II cities and it is clear that there are fewer new projects within Guangzhou and Shenzhen in the pipeline. In my opinion, we should view the supply-demand balance from a regional perspective instead of city by city, with the Tier II cities taking spillover demand from Guangzhou and Shenzhen. We can see that in the considerable leasing demand enjoyed by newly completed projects in Foshan, Dongguan and Huizhou over the last 2 years.

    With online retail set to capture a greater share of retail spending in China, we expect that new and expansion demand from e-commerce companies and 3PLs will be the key demand drivers in the PRD. This is set to buoy demand growth in Tier II cities, because efficient and affordable product delivery will become critical to distribution logistics success.


    Notes: The dots refer to projects developed by GLP, Prologis and Goodman
    Source: JLL

    About the author
    Silvia Zeng is the Associate Director of Research for JLL in Guangzhou, China.

    The Korean logistics market – following in the footsteps of Japan?

    December 15th, 2014 by Yongmin Lee

    The economies and real estate markets of Korea and Japan have many similarities so it’s not too surprising that I occasionally hear the Korean logistics market compared to its Japanese counterpart – only 15 years ago.

    Certainly, the local logistics market has a lot in common with Japan circa 2000:

  • Warehouse space is predominantly outdated and/or functionally obsolete due to one or a combination of location, design, specifications and building size;
  • Domestic conglomerates are the dominant market players but have typically run their own supply and distribution chains; and
  • As a result of the above two factors, the quantity and quality of leasable space is limited.
  • Since 2000, the Japanese logistics market has seen dramatic structural changes especially after the arrival of notable global logistics developers and, as a consequence, the market has evolved into one of the most active logistics investment markets in Asia. So is it possible that the Korean logistics market may follow a similar path to maturity? Well, over the past couple of years some positive signs have certainly emerged:

  • The Korean national government has designated the logistics industry as an economic growth engine with the stated aim of increasing logistics industry revenue by nearly 50% by 2017;
  • The outsourcing of logistics functions is on the rise. Government tax incentives and global competition are encouraging domestic conglomerates to utilise 3PL operators and to improve the efficiency and flexibility of their distribution and supply channels;
  • A forecast uptick in new supply is expected to significantly improve the quality of space available. The government’s ‘Logistics Service Improvement Plan’ released in August this year provides for investment of around KRW 1 trillion in new logistics facility projects. Private developers are also responding to growing tenant and investor demand for modern, hi-tech distribution centres in key locations; and,
  • Lease covenants are improving. As more blue-chip tenants occupy leasable space, the days of one to two year lease terms are disappearing and terms of up to 10 years are becoming more common, particularly for build-to-suit facilities.
  • While the market is still characterised by a lack of transparency and limited transaction volumes, the signs of progress are encouraging. How long the Korean logistics market will take to reach the level of maturity of its Japanese equivalent is of course hard to predict, but the improving fundamentals of the industry are likely to provide a compelling investment story to the increasing number of institutional buyers reviewing the sector in coming years.

    About the author
    Yongmin Lee is the Head of Research for JLL in Korea.

    Who will be the major players in Australia’s investment market over 2015?

    December 10th, 2014 by Jonathon Bayer

    Australian commercial property transaction volumes have once again reached record levels in 2014, the third consecutive year this has been achieved. A significant amount of investor groups, both foreign and local, have competed for assets driven by the hunt for yield and the opportunity for capital growth. As we come to the close of another calendar year, the question people are asking is: What will happen to investment volumes in 2015 and who are the likely buyers and sellers?

    One of the well documented trends is the increasing amount of offshore capital entering the country post the financial crisis. Australia’s economy performed strongly at a time when other major economies were contracting and the commercial property sector looked attractive to offshore investors. Australia’s property yields are high relative to other mature markets, while the deterioration in occupancy rates was less severe than other markets. The Sydney CBD vacancy rate is 10.1% – lower than 40 of 44 CBD office markets in the US. As a result, net investment flows were at unprecedented levels from 2010 onwards.

    Private investors who are typically counter-cyclical were net buyers from 2008 to 2012. A number of private investors acquired prime grade assets on attractive pricing metrics in 2008 and 2009. Average prime grade office capital values have risen by 19.5% since the trough. Some investors are taking the opportunity to realise gains and recycle capital into new opportunities in Australia or within the Asia Pacific region.

    Syndicates over the past two years have turned from net sellers to net buyers. The cost of debt is sub 5.0% for well-rated borrowers and enabled syndicators to manufacture higher equity IRRs.

    So what can we expect the Australian investment landscape to look like over 2015? The first question is where is the product is likely to come from. As mentioned earlier, asset values have risen by 19.5% between 2009 and 2013. A number of privates who purchased at that stage of the cycle will seek to crystalise gains over 2015. Syndicates who structured closed ended funds may be also coming to the end of the investment window and looking to trade out.

    On the other side of the ledger, offshore capital is again likely to be a major play in the investment space over 2015. Sovereign Wealth Funds, pension funds and private equity firms will remain active participants in 2015. A scarcity of core product will result in a number of groups looking to move up the risk curve and access core+ and value-add opportunities.


    Source : JLL Research

    About the author
    Jonathon Bayer is a Senior Research Analyst for JLL, based in Sydney, Australia.

    Modern warehouses to become nerve centres for Indian e-commerce players

    December 9th, 2014 by Suvishesh Valsan

    Retail real estate in India has witnessed interesting transitions over the past decade, from the dominance of unorganised mom-and-pop stores to organised shopping centres, and thereafter, the emergence of large-format, developer-managed shopping malls. More recently, the advent of e-commerce is gradually attracting the fancy of Indian consumers. Estimates from Gartner Inc. suggest revenue from the online retail platform is growing at 60-70% per annum, making India one of the fastest growing e-commerce markets in Asia-Pacific[1]. The trend poses a risk to malls that are old styled, poorly designed and strata sold. Already, vacancy rates in such malls have reached 20%, compared with under 10% in well designed and managed malls.

    The warehousing sector will likely experience a similar impact from the proliferation of e-commerce. Retail accounts for a significant share of the overall warehousing demand in India. E commerce has made significant inroads and the industry will increasingly rely on strong back-end support through logistics and warehouses. Existing warehouses in clusters such as Bhiwandi (near Mumbai) and Bhiwadi (near Delhi) do not have the necessary features for growth alongside e-commerce. According to an E&Y report on warehousing[2], close to 85% of warehouses that exist in India are old in terms of design and structure.

    Constructing a modern warehouse may return investment yields similar to that of an old warehouse, although demand is shifting towards the former. Following the impending introduction of the Goods and Services Tax, which will uniformly tax the interstate movement of goods, modern warehouses will enjoy better economies of scale. Old warehouses may meet with a similar fate as their counterparts in the retail mall space.

    About the author
    Suvishesh Valsan is a Senior Manager, Research for JLL in India, based in Mumbai.


    [1] Gartner Inc. publication -
    http://www.gartner.com/newsroom/id/2876517

    [2] The Indian Warehousing Industry: An Overview – Oct 2013 (Ernst & Young – Confederation of Indian Industry report)

     

    Speculation surrounding the Tianjin Free Trade Zone

    December 8th, 2014 by Chelsea Cai

    Recently, people close to the matter confirmed the submission of Tianjin’s application to the Central Government for a Free Trade Zone (FTZ). This comes one year after the launch of the Shanghai FTZ and has the market excited about what an FTZ might mean for the city and also if Tianjin might follow the Shanghai FTZ model. However, the Shanghai FTZ has had mixed results thus far and is still in the pilot stage. It may be too early to conclude that copying the Shanghai model will lead to successful outcomes in Tianjin.

    The Shanghai FTZ is focused on service sector reforms including trade, investment, finance and government administration. The majority of the reforms in the Shanghai FTZ will first focus on finance, such as policies that have been put forth on interest rate liberalisation and RMB convertibility.

    Tianjin Yujiapu Financial District

    Since the reforms in the Shanghai FTZ have been slow to materialise, Tianjin may instead want to structure its FTZ to focus on enhancing the competitiveness of industries already present or planned for the area. The most recent master plan for the Tianjin FTZ encompasses nearly 65 sq km, including Tianjin Port, Dongjiang Port and Binhai New Area CBD, e.g. Yujiapu Financial District and Xiangluowan Business District. The size of the area and the diversity of the industries contained therein give Tianjin FTZ a good platform to develop in the future. Thus, the local government should utilise the opportunity to promote the businesses and the real estate in these areas.

    The Tianjin government can help local businesses by:

  • Learning from the Shanghai FTZ and adopting the most successful policies;
  • Streamlining processes so as not to delay implementation of reforms, which has been a common complaint in Shanghai;
  • Positioning the FTZ to benefit from the regional growth spurred by the Capital Economic Circle integration plan.
  • At the moment, plans are still unclear, but details regarding the Tianjin FTZ are expected to be released by year-end. More specific rules and policies relating to the area are expected to be phased in over the next one or two years. However, the government has the opportunity to use the FTZ to help improve the local economy and generate more business activity for existing companies.

    For more details read our November issue of Tianjin Property Insight.

    About the author
    Chelsea Cai is a Senior Analyst in JLL’s research team in China, based in Tianjin.