Are Bangkok’s luxury apartments an endangered species?

November 24th, 2014 by Klongkwan Tangnukulkij

While the supply of condominiums in Bangkok has grown rapidly over the last several years, the stock of luxury apartments has been declining steadily. With a wider variety of products, amenities and locations that the condominium market has to offer, traditional luxury apartment tenants, most of whom are expatriates or long-stay tourists, are increasingly turning away from luxury apartments. Along with shifting occupier preferences, developers and operators are increasingly chasing higher yields by converting existing luxury apartment stock into condominiums, hotels, and serviced apartments.

Generally speaking luxury apartments are located in downtown and commercial areas, primarily in the Central Bangkok and the Central East sub-markets that include Sathorn Road, Silom Road and Sukhumvit Road. These locations have traditionally offered tenants good accessibility and an abundance of amenities. With much of the existing luxury apartment stock built before the 1997 Asian Financial Crisis, these developments typically feature much larger living spaces than more recently built condominiums. Equipped with the same modern amenities as modern condo projects such as swimming pools, broadband internet, and high security, as well as additional amenities such as tennis courts, squash courts, saunas and separate living quarters for maids, these existing luxury apartments are priced lower on a per square metre basis than the newer condominiums.

Figure 1: Historical Luxury Apartment Stock in Bangkok, 1995 – 3Q14

Source: JLL

Since 2008 many luxury apartments have been converted to serviced apartments, which typically provide daily amenities such as cleaning and housekeeping services while also being available for short-term stay. At the same time, some luxury apartments have been refurbished and then marketed as freehold condominiums. For example, a luxury apartment block on Sathorn Road, SC Sathorn Mansion, has been renovated and converted to a high-end condominium named The Hudson Sathorn 7. This project began pre-sales at the beginning of November 2014 with an average price of THB 130,000 per sqm, roughly 10% lower than the average price of THB 146,000 per sqm of new condominium projects in the same area.

With greenfield condominium developments and refurbished / renovated luxury apartments that have been converted to condominiums yielding returns that are more than double that of existing luxury apartments, we expect the future supply of luxury apartments in the Central Bangkok and the Central East sub-markets to be limited over the short term.

The general outlook for the luxury apartment sector is weak. Rents are likely to stagnate given the large supply of condominiums that are available for let. However our research suggests that the demand for 2-3 bedroom units from large expatriate families has been increasing steadily over time. Given Bangkok’s strategic location and the better outlook for the Thai economy with the formation of the ASEAN Economic Community by 2015, luxury apartments will remain relevant although they may not experience the same heights of the 1980s and 1990s.

About the author
Klongkwan Tangnukulkij is the Research Analyst in JLL Thailand’s Research and Consultancy group.

Sporting stadiums: sweating your asset

November 20th, 2014 by Timothy Ogilvie

Sporting stadiums have long been an important part of world cities, acting as a magnet for urban populations to congregate. In recent years the large volume of masterplan precincts and urban renewal projects has led to the development of many new sporting stadiums, often acting as the initial catalyst to create activity and exposure to mixed-use areas.

While governments and sporting codes have traditionally invested the upfront capital in sporting stadiums, the private sector has become increasingly involved in recent decades via a range of freehold and PPP arrangements such as BOOT (Build, Own, Operate and Transfer).  The sophistication of the investor profile and complexity of these structures has led to the sector generally seeking to maximise income on assets to ensure a positive return before returning the asset to government and sporting bodies.  As a result, the focus on the concept and design of new stadiums has magnified in recent years, with the incorporation of other uses critical to ensuring a successful commercial outcome.

JLL has had experience directly with some notable stadiums/events and their surrounding precincts, including:

  • Docklands Stadium (Melbourne, Australia);
  • Commonwealth Games Village (Gold Coast, Australia)
  • London Olympics (London, UK), and more recently;
  • The new Atlanta Braves Stadium at Sun Trust Park (Georgia, USA)

From witnessing good (and the not-so-good) examples of delivery, we have compiled a list below of considerations when looking to maximise commercial returns from new sporting stadiums:

  • Retail, Retail, Retail – sporting events and retail go hand in hand.  However, getting the scale and mix of retail right has proven tricky for many.  In pre-planning, the customer profile and their desired retail experience must be researched… it will pay big dividends.
  • Move the crowds from home to the bleachers – the cost of parking—both money and time cost—can be a deterrent to spectators attending a sporting event.  Governments and planners must ensure adequate public transport is in place so the masses can access the stadium without putting existing road infrastructure under stress.
  • Annual Activation – Monday to Sunday, summer to winter, AM to PM; the stadium precinct must be activated year-round to support ancillary uses.  While activating a stadium precinct year-round may mean holding multiple events, operators must also think outside the box. An example of this is VTB Stadium in Moscow, which is proposed to be located above an enclosed shopping centre, a development proposed in planning for the 2018 World Cup.
  • Low capital investment: low risk, potentially high returns – pop-up shops and space activation allow event owners and retailers to provide retail goods with minimal capital investment.  More importantly, it allows flexible space that can change to meet consumer demand over this long holding asset.  The Australian Open has been a good example of this, with bars and tents providing adaptable and low cost space.
  • All of the stadium is valuable real estate –it should be recognised that the whole stadium is valuable real estate. Other revenue streams, such as signage and telecommunication towers, should be explored.

Melbourne Docklands: As shown in the picture, Melbourne’s Docklands stadium shows many elements of those mentioned in this article, with: temporary retail spaces, mixed-uses surrounding the site and; public transport access.

About the author
Timothy Ogilvie is the Manager in JLL’s National Strategic Consulting team, based in Melbourne, Australia.

Watershed Moments in Indian Real Estate

November 19th, 2014 by Rohan Sharma

After over a decade of opening up the construction-development/real estate sector to private foreign capital, the policy has undergone several changes, and it is pertinent to list what may be called the watershed moments in the history of Indian real estate. While we focus more on the policies that opened the floodgates for FDI, the emergence of India as a major outsourcing/offshoring destination and its huge housing demand cannot be ignored. These factors, in their own right, prompted a more proactive policymaking approach to sell the India growth and returns story to global investors.

While outsourcing in India took small steps in the early 1990s, it was really the first decade of the new millennium that ushered in the emergence of the services sector, with India gaining global acceptance as an outsourcing destination. Stricter US visa norms also led to Indian technocrats finding it difficult to travel which made global technology firms invest in Indian offices to harness the local talent. Development of associated office projects also picked up momentum during this period.

The Department of Industrial Policy and Promotion under the auspices of the Ministry of Commerce & Industry, Government of India issued Press Notes through the 2000s to provide greater clarity on FDI flows in to the real estate sector.

The following table sets out the policy changes and key performance highlights during this period:

Source: JLL Research

The Press Note 2 of 2005 gave a huge boost to foreign investments in housing and township developments, with standalone commercial development projects also gaining traction.

In 2008, the government provided further clarity on 100% FDI in industrial parks, where under certain conditions, established industrial parks did not need to comply with the 50,000-sqm built-up area requirement spelt out under Press Note 2 of 2005.

The latest change has arrived in the form of the new Central Government dispensation reducing the minimum built-up area requirement to 20,000 sqm and reducing the minimum capitalisation by 50%. This is likely to boost capital inflow in the sector, while the recent Securities and Exchange Board of India guidelines on REITs are likely to further fuel investment growth in the commercial estate sector.

In another 3 years, we complete 70 years of independence and though skyscraper cities are still some time away, there is definitely progress on the anvil with focus on creating smart cities. Private fund participation will remain key to development and a proactive policy regime is likely to create a conducive environment.

About the author
Rohan Sharma is the Associate Director for JLL in India, based in Gurgaon.

Mind the (data) gap

November 17th, 2014 by Susan Sutherland

Recently, I saw two headlines which summarise the dichotomous view of data and analytics: one said ‘Saving the World? How Big Data Is Tackling Everything From Cancer to Slavery’ but it was sitting within a special page on the Bloomberg website entitled ‘Buried in Big Data.’ Indeed, big data – or any data–and the analytical tools that turn it into actionable insights provide massive opportunity, but can be equally daunting. While some industries or functions are known for capitalising on the power of analytics and big data (retail; banking; risk management),others have made less progress, for reasons of (at least perceived) lack of data, unwillingness or inability to invest in technology tools and specialists, or remaining scepticism about its value – no surprise given the hype-o-metre is off the chart.

JLL recently commissioned a survey from the global technology market research firm, Forrester Consulting, to assess corporate real estate’s current and planned data and analytics strategy, and how it supports the broader businesses of which they are a part. The survey reveals that the number of corporate real estate leaders who plan to be ‘data-centric’ – using CRE data to shape all their decisions—will double in the next three years from 28% to 56% (see figure 1). So there is a clear appetite to use the wealth of data that exists in real estate portfolios to drive better and faster decision-making, and to ultimately differentiate and generate competitive advantage. This is supported by, for many companies, a broader effort spearheaded by the C-suite, and backed up by increasing financial resources.

Source: Mind The Data Gap: Aspirations vs. Reality In Corporate Real Estate,
a commissioned study conducted by Forrester Consulting on behalf of JLL, November 2014

However, when probed in more detail, it seems that the CRE function is lacking some of the capabilities that are essential in achieving ‘data-centricity.’ They are focusing too much on how to get the data, and less the insights that it generates. While they say they are strongest at data gathering and storage, their weakest perceived capabilities are those which in fact add the most value – like establishing data and governance policy. It’s not entirely their fault – organisational barriers like fragmented data initiatives, and limited sharing of data across functions are standing in their way as well (which prevents the combination of different data series, both in and out of real estate to yield breakthrough insights). More disappointingly, CRE leaders are not seeing value in some of the most powerful tools – like real time and predictive analytics. This is a missed opportunity.

So how can they fill the gap between where they are and where they want to be, given these challenges? Stepping up efforts to work across departments to drive data and analytics, in acknowledgement of shared corporate goals, pivoting towards strategic rather than tactical data and analytics efforts, and cultivating/recruiting talent are just a start.

Read more in the upcoming paper from Forrester Consulting commissioned by JLL: ‘Mind the Data Gap: Aspiration vs. Reality in Corporate Real Estate.’

About the author
Susan Sutherland is the Head of APAC Corporate Research for JLL in Singapore.

What does Occupy Central mean for the recovery of the Central office market in Hong Kong?

November 14th, 2014 by Denis Ma

As Occupy Central enters into its second month, there are some concerns that the protests may derail the nascent recovery in the Central office market – where rents have returned to growth after two years of decline. Aside from disruptions to traffic flow, there are fears that the protests will tarnish Hong Kong’s long-term standing as a regional business centre or, worse still, could lead to a withdrawal of policy support from the mainland government. Questions have already been raised as to whether the protests were the reason behind the delayed launch of the Shanghai-Hong Kong Stock Connect pilot programme, a new cross border investment channel linking the two exchanges.

While these fears are conceivable, the reality is that the protests have yet to have any real impact on the Central office leasing market. For most of our clients, it’s business as usual. Importantly, none have withdrawn or scaled-back expansion plans because of the protests and none have indicated plans to relocate offices out of Hong Kong.

The few early indicators available in the market support this view. The Hang Seng Index, a bellwether for the health of city’s financial sector and Central office market, has remained largely unaffected – closely following global indices, including a 2% rise through October – while our latest in-house indicators for the Central office market show rents rising by another 0.2% m-o-m during the first month of the protests. The vacancy rate in Central did edge higher in October, from 3.6% to 3.8%, but this was largely due to a large lease expiry and at the top-end of the Central office market – i.e. Grade A1 – vacancy remained at just 2.0%.

There are, however, still significant headwinds for the Central office market over the near-term. Most notably, the end of QE in the US and steady normalisation of interest rates along with the ongoing slowdown of the mainland Chinese economy have the potential to weigh on office demand and rents. Rising short-term interest rates could trigger another ‘taper tantrum’ leading to strong capital outflows and the destabilisation of currencies and growth in the region, which would affect economic growth in both China and in Hong Kong.

In our opinion, it is the macroeconomic environment, rather than Occupy Central, that poses as the greatest risk to the recovery of the Central office market over the near-term. For the city’s retail sector, however, Occupy Central may just be the straw that breaks the camel’s back.

Central Grade A office index

About the author
Denis Ma is the Head of Research for JLL in Hong Kong.

Melbourne takes the lion’s share of recent education sector activity

November 13th, 2014 by Sean Burchell

The OECD offers an interesting perspective on the Australian education sector. The analysis shows that the proportion of young adults entering academic tertiary programmes increased by 40% between 2000 and 2012. A related indicator ‘young people expected to enter tertiary-type A (academic) programmes in their lifetime’ ranks Australia as 1st of 38 countries examined.

The growth in tertiary student numbers is having an impact on the demand for office space from the education sector. Across Australia, JLL has tracked 22 new commitments (>1000 sqm) by the education sector since 4Q13. Ten of these occurred within the Melbourne CBD or Melbourne’s decentralised office markets. One of the most active institutions – Monash University – leased space at 271 Collins Street (6,000 sqm) and 211 Wellington Road, Mulgrave (7,000 sqm).

The context of ‘why’ Melbourne may be seeing a larger proportion of education take up than other states requires a broader perspective.

Australian universities are well positioned to attract a growing share of international students. Australia is home to five of the ‘Times Higher Education top 100 universities (2014/15)’, while 14 Australian universities rank in the top 100 universities under 50 years old. Melbourne has two of the highest ranked universities: Monash University (83rd) and University of Melbourne (33rd and the highest ranked Australian university). Additionally the State government of Victoria, which is currently in election mode, has announced a plan to spend AUD5.2 billion over the next four years to deliver training for 850,000 Victorians, plus an additional 60,000 new apprenticeships.

Aside from the strong reputation of its education institutions, Australia is consistently ranked as a highly desirable place to live. The Economist Intelligence Unit’s ‘Liveability index’, which surveyed 140 cities, included four Australian cities in its top 10 most liveable places in the world. Melbourne was ranked first for the fourth successive year.

Education institutions tend to be price sensitive tenants who are willing to sacrifice high quality office fit-outs and prime location for lower rent. This constitutes a further strength for the Melbourne markets. A comparison of Melbourne CBD office rents with other Australian CBD office markets shows that although Melbourne is the second largest city in Australia, its office space is trading at a 16% discount to the national average gross effective rent.

Against this broad economic backdrop, we expect that the education sector will grow in importance for Melbourne’s office markets over the next few years.

We can expect:

  • Population growth rates arising from natural increase and inter-state migration will increase demand for educational services;
  • Increased public spending will support an increase in student numbers, while the ‘Melbourne brand’ will attract offshore students in increasing numbers;
  • The affordability and availability of B Grade office space will attract education providers to CBD stock, and
  • The education sector will play a more significant role across the metropolitan Melbourne office markets beyond the CBD.
  • About the author
    Sean Burchell is the Market Research Analyst for JLL, based in Sydney, Australia.

    How Philippine port congestion threatened industrial property market growth

    November 12th, 2014 by Sharon R. Saclolo

    Growth projections for the Philippine economy were dampened early this year when the well-intended traffic decongestion initiative by the Manila City Government led to congestion in the Port of Manila instead. The local government of Manila implemented an expanded truck ban in February 2014 to ease the traffic volume of its thoroughfares. Unfortunately, while it lightened the daily vehicle volume on Manila’s roadways, it unexpectedly affected the volume of imports and exports at the ports, prompting the lifting of the truck ban scheme in September 2014.

    The truck ban scheme and the massive traffic build-up it created had significant repercussions, especially on the burgeoning industrial property market. The Philippine Economic Zone Authority (PEZA) has expressed concern that the port congestion was putting a damper on the growth momentum of the economy by delaying the flow of trade goods and raw materials necessary for manufacturing. Notably, 75% of PEZA’s registered investors are export-oriented, with most of them located in industrial parks and facilities south of Metro Manila – a region that contributed more than 73% of the country’s manufacturing output in 2013.

    Night time vehicle volume in one of Metro Manila’s major thoroughfares

    Several companies heavily engaged in the supply chain and logistics industry have expressed concerns of slowdown and missed revenue targets because of operational delays due to port congestion. While the truck ban has been lifted, the flow of traffic in the port remains slow and, if left unresolved, the initial supply chain slowdown may seriously hurt the growth of the industry and affect the growth of the industrial property market.

    The short-term solution of restricting trucks on the road has a noble objective of decongesting the streets, but the rippling effects on the port activity clearly illustrate the interconnectedness of the urban system and the sensitiveness of the country’s supply chain industry. The way out is through coordinated efforts and better communication and planning between local governments and local government agencies that will help foster the growth of the economy. Regional infrastructure needs to be improved as the country further gears up for intensified competition due to the imminent ASEAN economic integration. The potential growth of the supply chain and the manufacturing industry is expected to further propel the growth of the economy and bring about the revitalisation of the industrial property market.

    About the author
    Sharon Saclolo is a Research Manager for JLL in the Philippines, based in Manila.

    The impact on Asia Pacific real estate from the end of US QE

    November 11th, 2014 by Megan Walters

    With the impact of the end of QE programme in the US, we have been discussing the range of likely effects on the commercial real estate markets in Asia Pacific. During QE the IMF issued spill-over reports looking at the global effects of QE via the transmission mechanisms of capital flows, interest rates and foreign exchange. The implementation of QE programmes in advanced economies produced significant spill-over effects, with strong capital flows from advanced economies into developing markets. Global interest rates have been driven lower and investors have been deploying additional capital into real estate in the search for yield.

    In Asia Pacific these two factors, foreign capital flows to developing markets plus additional capital deployed to real estate in search of yield, created a wave of investment in real estate that led some governments in Asia to implement regulations to cool real estate markets, primarily aimed at residential property. The effect of additional capital was also visible in commercial markets. In 2011 and 2012 total Asia Pacific commercial transaction volumes were just under USD 100b a year; in 2013 the volumes jumped 30 percent to USD 126b.

    In 2014, the global and inter regional capital flows of investment in Asia Pacific commercial real estate from global, US and Europe investors in the first nine months have already exceeded last year’s total by 35 percent. Continuing economic recovery in the US appears to be providing funds for US and global investors to deploy in Asia Pacific for diversification and we expect that picture to continue in the medium term.

    Within countries the government cooling effects have been successful so the picture is mixed on transaction volumes. So far this year transaction volumes in Asia Pacific as a whole have been stable, off five percent. In the large markets, Australia is up over 20 percent and continues to see strong cross border interest. Japan is stable with cross border investors meeting local investor pricing; whereas China is down around 20 percent, where the government’s cooling measures aimed at the residential market and developers have had a knock on effect to the commercial real estate markets.

    The ending of US QE should see the start of the normalisation of interest rates. The impact of potential interest rate rises and their effects on real estate yields should be off-set by the expectation of rising rents in most major office markets in the AP region. Our JLL Cap Markets research shows a strong correlation between rising short-term interest rates and rising rents; interest rates rise where economic activity is rising, which induces higher rents. Or interest rates rise as there is inflation in the system, again inducing rising rents.

    Overall, our view is that the weight of capital aimed at real estate will continue as the global economy and in particular the US recovers. Investors will continue to see core real estate as a highly attractive asset class in any portfolio, for its ability to deliver yield, stability of returns as well to act as an interest rate hedge. Asia Pacific will remain attractive as a key engine of global growth and as a diversification play for international investors.

    About the author
    Dr Megan Walters is the Head of Research, JLL Asia Pacific Capital Markets.

    Rental growth in China’s warehouse market is slowing down – should we be worried?

    November 10th, 2014 by Warner Brown

    In JLL’s Shanghai office, each quarter we compile data from twenty logistics hubs around China and run analyses on national trends. One of our most popular results is a national average of warehouse rents, which over the past several quarters has displayed a surprising trend: rental growth is slowing down, from a post-crisis peak of over 10% y-o-y over much of 2011 to nearly flat for much of 2014.

    This deceleration seems counterintuitive. After all, this is the property sector which many have highlighted for its fundamental imbalance between supply (restricted by government land policy and other priorities) and demand (elevated by China’s expanding consumer market). Shouldn’t continued landlord pricing power be a given?

    China’s slowing economy has made many firms more conservative in taking warehouse space, but that explanation alone is insufficient given that key demand drivers like e-commerce have held up well. Another factor is that our measures of market average are sensitive to changes in the composition of stock, especially the growing supply in lower rent Tier 2 cities relative to the existing concentration of stock in more expensive Tier 1 hubs. But that trend also does not account for all of the recent slowdown in rental growth.

    Our data lets us probe the question down to the city and submarket levels, and observe several additional trends.

    First, rental growth in Tier 1 markets has slowed due to the influence of satellite cities – markets that lie just beyond the administrative borders of the Tier 1 cities, but have similar access to key highways and a greater supply of more affordable land. Kunshan and Langfang are key satellites of Shanghai and Beijing, respectively. A key attraction for tenants is that satellite cities offer cheaper rents by as much as 25% compared to Tier 1 locations. Tier 1 landlords now compete with satellite cities for a chunk of their business, reducing scope for swift increases in rents.

    Meanwhile, several big Tier 2 markets such as Shenyang and Chengdu are in the midst of their first major supply booms, leading to vacant space in the short term and localised discounting that erodes average rental growth at a national level. Local oversupply is possible, but we expect vacancy to fall and rents to pick up as long-term trends like consumption growth and the inland migration of manufacturing continue to drive demand. In general we expect projects in established logistics parks to outperform those in emerging peripheral markets, where land is easier to acquire but demand often takes longer to materialise.

    Rental growth at the national level has slowed, but we anticipate it will pick up again as Tier 2 supply waves pass and the stronger Tier 2 markets regain pricing momentum. Our forecast of lower supply in Tier 1 markets (helped by ever tighter land policy) would reduce vacancy and moderately boost rental growth there, while satellite cities are expected to increase in number and continue growing strongly.

    Is the bull market in China’s logistics real estate sector over? Not yet.

    Source: JLL Research, Logistics Intelligence Service, 3Q14

    About the author
    Warner Brown is the Senior Manager in JLL’s research team in China, based in Shanghai.

    Law firms remain cautious, but real estate opportunities exist

    November 7th, 2014 by Myles Huang

    Law firms are a small part of the Asia Pacific office market but they make an interesting tenant group to look at. Mostly small occupiers (see chart), they comprise 5% or less of the overall Grade A market. However this space is not insignificant, given that they tend to concentrate their offices in the core CBD areas, to be close to their primary clients i.e. financial sector firms and major MNCs, especially given the concentration of foreign law firms in Premium Grade A offices.

    Chart: number of law firms occupying more than 5,000 sqm in 32 cities worldwide

    Source: JLL’s Law Firm Perspective, 2014
    The legal sector in cost-saving mode

    I’ve just finished working on a global report, in cooperation with colleagues in the US and Europe, looking at legal sector tenants in 32 markets worldwide. The Global Law Firm Perspective, 2014 examines what law firms should be thinking about as they plan their current and future space, and shows that international legal firms in seven key Asia Pacific cities have been in a cost-saving mode over the last 12 months.

    For the first three quarters of this year, Asia Pacific had the highest number of IPOs of any region and also experienced very robust M&A activity[1]. However, this is unlikely to flow through into increased space requirements from the legal sector. Our survey indicates that legal tenant demand in most AP markets is expected to remain stable over the next 12 months.

    As such, less than half of the surveyed markets are expecting rising rents/lower concessions and/or rising costs of fitting-out for legal tenants. This varied leasing market outlook, together with other emerging trends, should provide law firms in AP with good opportunities to adapt their real estate needs.

    Where are the opportunities for me if I’m a legal tenant?

  • If you’re in a market at the bottom of the rental cycle such as Australia, act now and make use of current tenant-friendly market conditions to lock in good longer-term deals or build in more flexible lease terms.
  • Newly constructed buildings with more efficient layouts present an opportunity to better utilise the space you’re taking. Look at new and upcoming buildings in China, Singapore and Tokyo to name a few markets.
  • Adopt more flexible workplace strategies – currently only Australia and Hong Kong are seeing law firms on the whole adopting new working styles and new technology (e.g. one Australian law firm recently opted for a wireless office, allowing lawyers to work anywhere they choose), but expect this trend to accelerate.
  • Robust portfolio examination is the key – law firms in AP generally lag behind their peers in the US and Europe in reviewing their real estate portfolios in light of cost and efficiency (i.e. space required for client-facing functions, whether high-cost space can be justified to house back-office functions, shifting towards offshoring and outsourcing, etc.). Our firm will be happy to advise and work with you on this!
  • To gain more insights, please read our report.

    About the author
    Myles Huang is a Local Director, Asia Pacific Research for JLL, based in Hong Kong.

    [1] Source: EY Global IPO Trends 2014 Q3