Slower start – faster finish: 2014 Asia Pacific commercial real estate volumes outlook

April 23rd, 2014 by Megan Walters

Following a record year in 2013, preliminary transaction volumes in Asia Pacific in the first quarter of 2014 slowed to USD 23.1 billion. Some of the larger markets however delivered solid performances with Japan and Australia up on the same quarter last year by 15% and 31% respectively. Elsewhere round the region new sources of capital are actively looking at Asia Pacific, particularly core gateway cities. We expect volumes throughout the year to pick up and show overall growth on 2013 as a number of large megadeals are being prepared for disposal. There is also an expectation of a significant turnover in the private equity market with a wave of closed-end funds maturing throughout the year. On the flipside, a number of large PE firms have raised fresh equity so that segment of the market will be active too.

In terms of volumes in the key larger markets, Japan was again the standout performer across the region, accounting for a whopping 53% of regional transaction volumes. Investment volumes reached USD 12.2 billion, up 15% on the same quarter of last year. Portfolio transactions and foreign investors played a healthy role during the quarter and a number of large megadeals also boosted overall volumes. We think the general trend in Japan will remain positive from a liquidity and transaction standpoint and we expect the market to continue experiencing strong growth in 2014.

Transaction volumes in Australia commenced the year in line with expectation with volumes up 31% from the same time last year, but down 34% from the strong finish in 4Q13. Overall volumes in 1Q14 reached a reasonable USD 4.2 billion. Investment activity in 2014 will be hard pressed to match the 2013 highs as opportunities become scarce and fewer large assets are finding their way to the market. Foreign investors remained active in 1Q14, accounting for 32% of all deals.

In China investment volumes moderated in 1Q14, down 18% y-o-y to USD 3.0 billion. The quarterly volumes in China are highly variable on a quarter by quarter basis for example moving from USD 6.1 billion in 2Q 12 to USD 2.6 billion in 3Q 12 and back to USD 8.4 billion in 4Q 13. The debt markets remain a concern following a large default by a Chinese developer, highlighting the prevalent risk being taken by some firms and the potential stress in the Chinese economy, however we anticipate the commercial property market will see an acceleration in transaction activity through the rest of the year driven by private equity groups.

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

The centralisation trend in Melbourne is set to continue in 2014

April 21st, 2014 by Sean Burchell

Average incentives in Melbourne CBD office markets continued to increase this quarter, albeit fractionally, to an average of 37 months free (assumed 10 year lease term). Coupled with stagnant effective rents and high vacancy, the CBD is presenting an ever attractive value proposition for businesses hoping to upgrade their current tenancies. Amid a skyline increasingly populated by high rise residential apartments and government commitment to infrastructure improvements, the trend of traditionally non-CBD tenants centralising their operations has continued. Since 2008 we have seen 47 major tenant moves (>1,000 sqm) by occupiers moving into the CBD from decentralised markets.

Historically the amenity of the CBD office market has come at an average premium of 25% extra gross effective rent when compared with the Fringe and Suburban markets. The Fringe market consists of approximately 1.6 million sqm in a concentrated ring surrounding the core CBD market, while the Suburban market consists of 1.3 million sqm of space spread throughout the South Eastern Suburbs of Melbourne. While the Suburban market has been able to maintain its discount through lower average face rents, the Fringe has increasingly relied on larger incentives to retain Fringe tenants. Presently incentives in the Fringe market are at an average of 32 months free and average outgoings have grown 40% over the previous decade. When considering net effective rents current conditions reflect Fringe assets earning 19.4% less than their Suburban counterparts. If this eroded profitability continues Fringe landlords may find themselves in increasingly difficult bargaining positions when seeking to secure tenants.

Recent large tenant moves from the Fringe to buildings in the CBD currently subject to refurbishment works suggest that centralisation is a compelling value proposition for more than just the rental metrics. Australia Post has recently signed a lease for 10,000 sqm of space in 180 Lonsdale Street and Cardno has signed to 4,700 sqm of space to 501 Swanston, both buildings are undergoing extensive refurbishments. These deals would have been impossible to make in the Fringe with a significant lack of prime contiguous space currently available in the market; just one building has over 4,700 sqm of space available. The development pipeline in the Fringe is also very tight with only 12,100 sqm of space under construction, of which 48% is pre-committed. Quality space still leases well amid the current weakness in demand but it is simply not available in the Fringe at the moment and in light of the current demand pipeline is unlikely to change.

About the author
Sean Burchell is the Market Research Analyst for JLL, based in Sydney, Australia

The Smaller, the Safer?

April 17th, 2014 by Chen Lou

When planning a successful shopping centre, location is always a top priority. If a retail project sits in the middle of a busy commercial district, or a densely populated residential area, the starting point is a catchment with lots of potential customers. But in an era with oversupply looming in many cities in China, and landlords having a harder and harder time pre-leasing space, do smaller shopping malls have less execution risk?

During a recent field trip to Zhabei district, a densely populated and mature residential part of northern Shanghai, we found three cases of low occupancy, community-oriented shopping centres that from a location perspective can be considered “good” sites. The three projects have been operating for more than one year, but average occupancy is still less than 50%. After going through Shanghai’s retail supply list, we found a significant number of smaller projects (20,000 – 50,000 sqm) in residential areas that are struggling to find tenants throughout a long period of time to reach stabilisation.

What are the reasons behind these projects’ struggles? Inexperience on the part of the landlord can lead to a lack of understanding of the catchment area and poor planning of the project positioning, including:

  • A mismatch between the types of tenants and income level of the neighbourhood;
  • Ineffective or inexperienced leasing teams for finding non-anchor tenants, especially after a supermarket, cinema or KTV have been secured;
  • Rental expectations that are too high.
  • If the average housing price near a community mall is low, residents in the neighbourhood tend to spend most of their time and money in the anchor supermarket rather than the other stores. If the catchment area has many high-end residential projects, but the mall doesn’t offer interesting lifestyle tenants, consumers may instead drive to a destination shopping mall further away for more options. Another execution risk is when anchor tenants “steal away” consumers rather than securing foot traffic for the whole property. Supermarkets or cinemas will often have their own direct access points and consumers can easily bypass the rest of the property if there isn’t a sound conversion strategy to lure them in. In conclusion, while these malls will probably stabilsze eventually, once the landlord gets the positioning right, ‘going small’ is not a panacea – there is still plenty of execution risk. Careful planning and a strong retail asset management team are critical to ensure a successful shopping centre.

    About the author
    Chen Lou is a Senior Analyst in JLL’s research team in China, based in Shanghai.

    Occupational fundamentals supporting higher investment volumes

    April 15th, 2014 by David Green-Morgan

    Another year and another quarter of investment volume growth around the world. Investment markets which have grown consistently over the last four years have started 2014 brightly with 23% growth compared to this time last year.

    Much of the growth over the last four years has been associated with a hunt for yield globally, not just within the property sector but across the global capital markets. With government bond yields at historic lows in many countries commercial property has provided an attractive source of risk adjusted investment returns, with many groups investing in the sector for the first time.

    However, while investment volumes have continued to improve, occupational fundamentals have struggled post the financial crisis. The structural changes happening in the financial services industry have forced occupiers to consider their longer term space needs, in terms of quality, quantity and location. This has made for a depressed and stagnant leasing environment in many cities. This now seems to be changing with many more cities seeing an improvement in take up fundamentals and a return of rental growth across many of the office markets JLL covers globally. The improvement is not uniform, with many cities still providing plentiful options for occupiers it will be a long process, but we certainly seem to be seeing the first signs that the corner has been turned.

    This should give renewed impetus to investment markets, stronger corporate demand coupled with financing markets returning to normality in most countries will provide an additional level of enthusiasm for investors to proceed with purchases. In addition the rise in values is encouraging vendors to place more stock into the market place, particularly in 2014 portfolios and larger lot sizes.

    With US$130 billion transacted in the first quarter of 2014, we are confident that we shall see another year of investment growth. At this stage we are estimating US$650 billion for the full year, 10% higher than we recorded in 2013.

    About the author
    David Green-Morgan is Global Capital Markets Research Director, based in Singapore.

    Has the importance of physical retail space been vindicated by Alibaba?

    April 11th, 2014 by David Raven

    Alibaba’s decision to significantly invest into Intime Retail, which operates 36 department stores throughout China provides an interesting insight into how internet retailers might be viewing the importance of multi-channel retailing and the role of physical retail stores.

    China’s Alibaba Group, one of the world’s largest internet retailers, globally has agreed to invest US$ 692 million to acquire a 26% stake in Intime Retail (Group) Co., the Hong Kong listed operator of predominantly luxury orientated department stores, throughout mainland China.

    While this news should not be read as a reversal of the significant global trend of retail spending switching from some physical retail stores to the internet, it is in our opinion a vindication from one of the strongest internet retailers as to the ongoing importance of physical retail space.

    We anticipate that the most successful retailers in the future are going to be those with a complete multi-channel offering. Those providing efficient and convenient methods of sales, deliveries and returns through both a physical store portfolio and a strong internet platform will likely be the best performers. Much comment has been made of “older” retailers having to modernise and embrace the growing trend of internet selling in order to survive in the modern retailing world. As the online competitive landscape evolves, it will be interesting to observe whether other internet retailing giants follow Alibaba’s move into physical stores almost as a second generation evolution of e-commerce.

    In addition to retailing, the ownership and management of retail places is becoming increasingly specialized and challenging. Shopping mall owners need to ensure that their retail assets remain relevant in the rapidly evolving retail landscape. Nowhere is this more prevalent than in China, which has the world’s largest supply pipeline of shopping malls under development. As luxury brands and first mover fast fashion retailers look carefully at and rationalise their own expansion plans, developers might look to attract internet based operators as one way to ensure that their malls remain competitive. Don’t be surprised to see landlords chasing the signatures of internet retailers with as much vigor as they once did with global luxury brands and international department stores.

    JLL global retail research team has completed a fascinating piece of research called Redefining Retail Places. While it can be read as presenting a daunting future for shopping malls, its themes should certainly be used to form part of the picture when owners are making: buy; sell; hold; joint venture and strategic management decisions.

    Our most recent outlook to retail real estate investment in Asia Pacific also highlights an expected trend of specialist retail asset managers and co-investors playing a growing role alongside the investment capital and developers, in ensuring assets are built and managed to their best advantage.

    We are confident of the role that physical retail space will play in retailing going forward, however, we believe that now more than ever the design, development and management of retail assets requires greater specialist skills from ever before.

    About this author
    David Raven is the lead director for retail investment for Asia at JLL.

    Changing house design in Indian cities- experiences and memories

    April 10th, 2014 by Ashutosh Limaye

    Nothing is more permanent than change. Sometimes the change is sudden, but more often it is continuous and subtle, and we tend to realise it only when we miss what has changed. Residences in urban India illustrate this process of steady and subtle change, which most people will relate to easily. Features and components of houses we grew up in are already a part of history, and today’s style and components will also have an expiry date. As we do not build houses the way we used to, among the many things I grew up with that I miss now are:

    Having breakfast on my balcony, playing indoor games on the veranda during harsh summer afternoons, the cool breeze entering my house and comforting me as I read, chandeliers hung from high ceilings creating moods with their play of light and shadows, making play areas in the corners and courtyards of buildings, running into a ground floor flat for water after cricket or football, making a herbarium for show-and-tell with plants from my old building, and the list goes on.

    The rise in property prices because of large-scale urbanisation and the failure to unlock new land for cities is the main reason for changes in house design. Balconies are a luxury few can afford. Since their inclusion in the Floor Space Index, verandas have turned into guest rooms or sitting areas for growing families. Rooms with two sides open are no more, creating a dependence on air-conditioning. Changing by-laws have forced lower floor heights and have made the ground level into parking under stilts. Today’s tendency is to build one bigger and taller building instead of a group of smaller and shorter ones, and this has led to those numerous smaller semi-private open spaces vanishing. We have tried regimenting nature by planting only certain types of trees and shrubs that are easy to grow and have modest requirements for air space.

    However, I enjoy watching the city’s pace from my French windows, the time I save to reach the gym in my complex, not walking in the rain to my car, spending less than a minute to go from the parking floor to the 20th, feeling the high from my 20th floor house overlooking those buildings shorter than mine, and this too goes on, but I must say that this list is shorter than the other.

    I have a trick: when I am nostalgic, I slip into my private virtual world of memories, relive moments spent in my earlier homes and come out into the contemporary soon enough. If I succeed in enjoying the contemporary, I shall create more fond memories for the future, since today’s contemporary could be tomorrow’s obsolete! I like to think that houses of today are as good as houses of yesterday, for the fact that they have always housed us and our expectations in the best manner they possibly can.

    About the author
    Ashutosh Limaye is the Head of Research and Real Estate Intelligence Service for Jones Lang LaSalle in India, based in Mumbai.

    Teflon Thailand – How Resilient is Bangkok’s Office Market?

    April 9th, 2014 by Andrew Gulbrandson

    As we enter the second quarter of 2014 here in Bangkok, clients, corporates, the media, academics and colleagues alike are all asking us the same two questions – What is the impact of the current tense political situation on the real estate market and how does it compare to previous disruptions?

    In what has become an almost boilerplate response, our answer invariably ends with “it depends.” It depends on the market sector and market segment in question, underlying local, regional, and global trends impacting each sector and segment and so forth. Furthermore, when we are asked to compare the current situation to past periods of disruption, each of these variables and more must be considered.

    Since the SARS outbreak in East and Southeast Asia in early 2003, Thailand has experienced natural and man-made disruptions on average once every seven quarters. Overall, both Thailand and Bangkok’s economies have been largely resilient in the face of these events, with various economic sectors rebounding almost instantaneously and others trailing a quarter or two behind, leading the global media to coin the phrase “Teflon Thailand.”

    To uncover just how resilient and robust Bangkok’s real estate market is, we scrutinised quarterly demand-side dynamics in the city’s Prime Grade CBD office market. Our analysis encompasses net absorption and gross rents across seven distinct periods of disruption since 2003, and compares the two indicators in the quarter in which a given event occurred or had the most serious impact alongside the subsequent quarter. Figure 1 illustrates net absorption dynamics while Figure 2 describes changes in gross rents.

    Figure 1: Net Absorption Dynamics in Bangkok’s Prime Grade CBD Office Market

    Source: JLL Research

    Figure 2: Gross Rent Dynamics in Bangkok’s Prime Grade CBD Office Market

    Source: JLL Research

    Looking at the two indicators, certain trends are fairly obvious, such as negative net absorption and declining rents during the Global Financial Crisis. On the other hand, the confluence of other macro and micro trends is less pronounced. For example, between 2003 and 2006, both the Thai and global economies were robust, leading to strong demand for office space. Yet because there was still a large amount of vacant space available in the wake of the 1997 Asian Financial Crisis, strong demand in 2003 led to a negligible increase in rents while in the 2004-2006 period, a dearth of new construction and sustained demand drove rents higher, regardless of the disruptions.

    The main difference between the ongoing tense political situation and past events is that previous disruptions were largely short in duration (e.g., Military Coup, Airport Closures) or had an indirect impact (e.g., SARS, Boxing Day Tsunami) on Bangkok. The current Bangkok-centric situation is entering its sixth month with no clear end in sight, leading to sustained and intensifying uncertainty in the market.

    With an increasingly strong global economy in recent years, growing demand for Prime office space since 2011 has led developers to bring nearly 100,000 sqm (NLA) of new Grade A space to the market by year-end. Given these trends and the near record demand across Bangkok’s real estate market sectors in 2013, it is reasonable to expect that 2014 should be another healthy year for the market.

    Unfortunately, the reality on the ground is that – It Depends.

    About the author
    Andrew Gulbrandson is a Manager in JLL Thailand’s Research and Consultancy group, based in Bangkok.

    Experience of an Expat

    April 8th, 2014 by Rachel Coates

    As an English expat living and working in Sydney, I quite often get asked about the differences between working in the UK versus working in Australia. Most notably, the lack of sun in the UK means I rarely worried about sunscreen on a property inspection!

    My strategic consulting role has provided me with a great range of exposure to the Sydney, NSW and Australian property market. From my experience so far I would note the following observations:

  • Housing is expensive. Even after allowing for earning dollars instead of pounds, housing is still expensive, both in terms of rental and purchase price. For example the rent on a one bedroom apartment in Randwick, Sydney is around USD460 per week. While it’s hard to find an exact equivalent, a similar apartment in Bristol would be USD330 per week.
  • Acronyms are confusing in any country, and just have to be learnt. For example talking about a Gross Realisation (GR) in Australia is a Gross Development Value (GDV) in the UK. Not to mention FSR, FSA, GFA to name but a few!
  • Australia is large. Having inspected Bega, Bourke and Broken Hill I now understand how the UK can fit into NSW three times, and the implications this vast geography has. That is why it is surprising that in such a vast continent, urban land values are so high. Put this down to urban planning policies that encourage high density urban living. While land in the UK is naturally scarce, the scarcity in Australia is largely contrived by planning and transport policies.
  • Despite obvious differences, it’s encouraging to find that common themes apply to the same asset classes regardless of country. For example, retail still needs a catchment, office uses need clustering, and community uses often impose limitations on development feasibility.
  • There is much that each country can learn from each other in the real estate sector. For example, student accommodation, while growing in Australia is still behind the UK, and it’ll be exciting to watch this space develop in the next few years under the impact of growing investment in the sector and the steady growth of offshore students coming to Australia to further their studies. On the other hand, the Australian retail sector is very different from the UK where high street shopping is the norm. In many ways Australian retail management is ahead of the UK which explains why Australian investment is flowing into the UK shopping centre market at the same time as UK retailers such as Topshop are arriving in Australia.
  • It’s been a great learning curve and one which I am sure will continue.

    About the author
    Rachel Coates is a Senior Consultant in the Strategic Consulting team, based in JLL’s Sydney office, Australia.

    A Respite From The Large Singapore Office Supply in 2016

    April 3rd, 2014 by Cedric Chng

    JLL estimates that close to 4 million sq ft of new office space is expected to complete in Singapore in 2016, a historical high since 1997, and exceeding the 10-year average annual island-wide demand of 1.5 million sq ft. The large pipeline in 2016 thus poses some concerns for the market.

    With more than half the supply pipeline in 2016 – almost 2.5 million sq ft – attributed to a single office space project jointly developed by the Singapore and Malaysian governments following a land-swap deal in 2010, the vacancy level in the CBD could rise.

    Source: JLL Research 4Q13

    However, from the chart depicting the upcoming completions from 2014 to 2017, it should be noted that the Singapore office market is expected to face a supply drought in 2015 and 2017. These periods of limited new supply could thus provide some respite from a potential oversupply situation in 2016, should the construction duration of the other projects quicken or be delayed.

    Already, several office developers have reportedly been observed to make regular revisions to the target completion dates of their projects, even when developments are well into their final phase of development. Some examples in recent years include MND Building, which was completed earlier than initially expected, and Orchard Gateway that saw its initial 2013 target completion delayed to 2014.

    With the bulk of the supply pipeline being in the CBD, the market is also likely to experience a quicker take-up due to its prime commercial location and better office specifications that are available to office occupiers. Along with efforts by the government to transform the CBD to include more lifestyle amenities, these factors could thus support the Singapore office market in mitigating the large oversupply situation in 2016.

    About the author
    Cedric Chng is the Senior Research Analyst for JLL, based in Singapore.

    Takeaways From Field Research Trip To Wuhan

    April 1st, 2014 by Mark Ho

    In a recent field research trip to Wuhan, where I spent many hours with our local team on site visits and in-depth discussions with various real estate market players, I came away with the impression that there remains considerable pent-up demand in the Grade A office sector despite what headline numbers suggest. With a vacancy rate of 25% as at end-2013, one would think that there is ample slack in the market that would undermine landlords’ pricing power. But anecdotal market evidence suggests otherwise:

  • Corporate Centre No.5 in Wuhan Tiandi is located some distance away from the CBD’s centre of gravity. Yet it is practically fully occupied with good tenants and commands the highest rent in the city.
  • Guangdong Development Bank Tower in the heart of the CBD arrived in the market in 4Q 2013. Within a quarter of its launch, strong take-up velocity pushed the occupancy rate from 20% to almost 70% now, even as the landlord continues to increase its asking rents.
  • Despite being located in Wuchang District, Wuhan Wanda Centre has successfully attracted reputable firms and MNCs from across the river and has now stabilized at a high occupancy rate.
  • The reason for the seemingly high vacancy rate can be attributed to a few buildings that have been included in our Grade A basket – they meet our quality standards – but are suffering low occupancy levels for unique reasons. One of the buildings with about 30,000 sqm of vacant space, we learned from the leasing agents, has a landlord that has not been pushing it to the market. Another building which is less than 40% occupied has priced itself out of the market by asking for rents that are 35% higher than a neighbouring comparable building.

    As unscientific as it seems, anecdotal evidences such as these reveal important insights into emerging markets where sample sizes are small and constitute an important part of bottom-up research. By removing the few buildings that are experiencing low occupancy rates due to unique non-commercial reasons, a more representative Grade A occupancy rate would be in the region of 90%. Coupled with steadily increasing rents since 2009, it becomes clearer that some demand for Grade A office space in Wuhan remains under-served by the current limited stock of high quality office space.

    About the author
    Mark Ho is the Local Director in Research and heads up Real Estate Intelligence Services (REIS) China for JLL. He is based in Shanghai.