Jobs and housing demand in Sydney – a relationship to watch

October 23rd, 2014 by Rupa Ganguli

Strong housing price growth over the past three years in Sydney has been the hot topic of discussion amongst economists, property commentators and the media locally and offshore. In the year to Q2/2014, real price growth of 12.5% has been well above the five year annual average of 4.5%. September quarter data from RPData-Rismark indicated relatively solid dwelling price growth in Sydney over the quarter, in relation to the other capital cities. However, the consensus seems to be that housing price growth will start moderating in Sydney over 2015.

The household debt to disposable income ratio has been rising in Australia, especially in cities such as Sydney, with growing leverage as households jump into the property market, upgrade their property or buy an investment property or two. This is unlikely to continue if interest rates rise and wages growth does not keep pace.

The net shortage of supply in relation to demand, the low interest rate environment and a pickup in foreign buyer interest have been the most common reasons used to explain the dwelling price appreciation. What is surprising is that the recent strong home buyer activity occurred during a period of weak employment and wages growth, which could be partly explained by an investor led recovery. Housing finance commitments by investors in the state of New South Wales rose by 42% in the year to FY2014 to AUD $52 billion, while loans to owner-occupiers (excluding re-financing) increased by 20% during this period, to AUD $64 billion.

Interest rates were a more important factor driving the last two house price cycles rather than employment conditions, with the Federal Government’s doubling of the First Home Buyer grants also having an impact during the 2009 peak in housing price growth. Since 2008, it appears that house price fluctuations in Sydney have been a lead indicator of office demand and subsequent rental growth movements, rather than being a laggard.

Demand conditions in the major Sydney office markets are starting to improve in 2014 as the housing market moves into a contractionary phase. The two different property sectors may be at turning points of the demand cycle so one must keep watch.

House price movements: an important indicator of office demand in Sydney

About the author
Rupa Ganguli is focused on analyzing the Australian residential market for JLL, based in Sydney, Australia.

Next Generation of Retail Outlets in China

October 21st, 2014 by Chen Lou

On a recent trip, I had the chance to visit Gotemba Premium Outlets, one of the most famous outlet malls in Japan. Sitting at the foot of Mount Fuji, and only a two-hour drive from Tokyo, Gotemba attracts millions of shoppers and tourists each year. Opened 14 years ago, with a mix of high-end and mass market brands, the property is frequently studied as a successful example of outlet mall execution. At 48,000 sqm NLA, this project is an average size by Japanese standards and was a JV between the then-largest outlet developer in the world, Chelsea Property Group (now part of Simon Property Group after a 2004 merger) and Mitsubishi Estate of Japan.

What makes Gotemba successful? Although the architecture is that of a typical American-style outlet, i.e. outdoor, one-storey and with a large land footprint, the view of Mount Fuji gives the property strong tourist appeal. Second, the outlet can be accessed by multiple modes of transportation, including free shuttle buses from the nearest train station and various buses directly from Tokyo. The outlet also appears prominently on free tourist maps. Finally, the outlet operator pays great attention to detail in marketing and customer service, including the following strategies:

  • The centre’s website can be viewed in six different languages,
  • All areas are handicapped-accessible,
  • There are strollers and wheelchairs available for rent; and
  • The directory not only lists shops, but also points out a Ferris wheel and the best spot to see Mount Fuji.
  • During my visit, besides loads of shoppers being dropped off by bus, I also saw local residents walking their dogs and children having a great time in the playground. It seems the centre is not simply an outlet, but also a friendly community gathering point.

    Is there a Gotemba in China?

    I think the answer is “coming soon”. In my view, China has experienced two generations of outlets. The first generation is represented by projects such as Yansha Outlet in Beijing: big box, simple construction, indoor format, and locally developed and operated. As China’s top outlet by sales, its success lies in its price advantage. Projects such as Tianjin Florentia Village represent the second generation: foreign developer, international style, outdoor and suburban location.

    The third generation, in my opinion, will be projects similar to Gotemba Premium Outlets that offer more than just shopping. The outlet landscape is becoming more and more competitive. Suzhou Village, a recently opened outlet developed by Value Retail Group, has many of the advantages of the Gotemba outlet. It combines a relaxing environment with a view of Yangcheng Lake, lakeside dining, art galleries, and a playground. If Suzhou Village succeeds, other new Chinese outlets will follow suit and offer a more sophisticated shopping environment.

    Today’s consumer is increasingly price-savvy as a result of rising international travel and extensive online shopping exposure. Also, as rents in full-price malls continue to rise, many retailers find outlet locations appealing. Specially-produced “made for outlet” product lines can be offered for the price-conscious consumer. With rising car ownership rates, the idea of a “day trip” outside the city is catching on.

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

    Are community malls still an opportunity for new players in Bangkok?

    October 20th, 2014 by Krit Pimhataivoot

    One of the major retail trends in Bangkok that has interested me over the past few years is the growing number of community malls. Therefore, with many new players entering the market recently, I have started to ask myself, “Are community malls still a good opportunity for new-to-market investors?”

    What is a community mall? There is no single definition of a community mall in Bangkok. Basically, it is a mall situated in a residential area. However, in Bangkok, there are small community malls in suburban sub-markets that serve the need of a particular residential community until a larger-scale community mall in the Central Business District targeting white-collar workers opens. To distinguish a community mall from other shopping centres, we have to look at the size and design.

    As the lifestyle of Bangkok people has changed, centres that offer convenient dining, shopping and the chance to relax have become more popular. With high traffic congestion in the city, community malls that provide sufficient parking space and easy access have become more attractive to consumers. From a total leasable area of 530,971 sqm in 4Q07 to 988,631 sqm in 3Q14, community mall space has risen dramatically and now accounts for 18.8% of the overall retail market leasable area. This figure is expected to grow to 21.8% by end-2016.

    Since community malls generally focus on small groups of customers, many large retail developers decided not to enter this market, preferring to invest in larger-scale projects. Hence, there are a limited number of players in the community malls market: Siam Future Development, the largest with 17 malls across Bangkok; K.E. Land, a developer that made a successful breakthrough with The Crystal in 2007; and Toyota TBN, a Toyota service provider and landlord that utilised adjoining vacant land and turned it into a successful community mall, The Paseo, in 2008.

    Although many of the recent new-to-market players fail to capture demand, this does not mean that the opportunity window has closed. The success of a community mall depends on many factors. For example, some strategically located projects by new-to-market developers have been performing well, such as Seenspace 13, a small community mall with the unique selling point of turning its common space on the ground floor into tables for restaurants and bars at night; the mall had a 4.0% vacancy rate in 3Q14. Another successful project is Rain Hill, a green concept community mall with a well-planned tenant mix targeting white-collar workers in the Central Business District and a 4.3% vacancy rate. Thus, besides the basic retail factors of good location and experienced management, unique selling points are critically important, as they differentiate the malls from other shopping centres. With the widespread expansion of residential areas in the suburbs along with the upcoming subways and sky-trains, there is still room for newcomers; however, with their relatively smaller scale, new community malls will have to be more innovative in both design and tenant mix if they are to be successful.

    About the author
    Krit Pimhataivoot is the Research Analyst in JLL Thailand’s Research and Consultancy group.

    Australia’s international retail revolution

    October 17th, 2014 by Andrew Rojek

    Australia has consistently had a strong business environment, an enviable economic position and exceptionally robust consumer spending trends. But in more recent times, the Australian retail landscape has changed, and international retailer brands have been knocking down the door to get a foothold in the market.

    As Cameron Taudevin, JLL’s Australian lead for retail leasing, describes “The industry has always recognised the strong underlying fundamentals of the domestic economy with solid population growth and high levels of discretionary income for many Australians – this is now transitioning into a clear increase in interest and entry activity for many international groups”. As a result there has been an influx of international retailers seeking to capitalise on this opportunity through entering, or expanding their presence within, the Australian market.

    Interestingly, the level of competition in the Australian retail market in undergoing a structural change as a result of this influx, with a new model for globally competitive retailing being brought to our shores. Through sophisticated supply chain integration and well-established brands, many international retailers have a significant strategic advantage compared to domestic retailers with regard to price, retail experience, range, quality and speed of bringing new product to market. This strategic advantage and level of consumer demand for such brands is evident in the sales performance of many new international entrants, particularly in the fast fashion market segment.

    Fast fashion retailers such as Zara and Topshop have opened to huge receptions across Australia, and have recorded exceptionally strong performance. Zara, for instance, generated $68.0 million from its operations in its first year in 2011. By 2012, sales revenue had increased to $106.8 million with an estimated gross profit margin of 66.7 percent.

    “Several weeks ago, Zara opened its first Australian store. 80%, or $1.2 million of stock was sold on the first day of trade.”
    The Age, 2011

    “Around 250 shoppers … queued up overnight to be the first to get a piece of the Topshop action in Melbourne yesterday.”
    The Telegraph, 2011

    In addition to Zara and Topshop, retailers such as Forever 21, Uniqlo, H&M and Gap are all at various stages of executing their entry strategies for the Australian market. This week, in fact, has seen H&M and Uniqlo open stores in Sydney, and Forever 21 open its first Australian store on Brisbane’s Queen Street.

    As this market continues to gather momentum within Australia, we can expect that the wave of international retailers will continue. In turn, the on-going hunt for adequate space and floorplates in premier locations by these retailers is likely to become even more competitive. Successfully leveraging this demand provides the opportunity to enhance asset values for landlords, and drive the renewal of old and underutilised CBD space in Australia’s capital cities.

    About the author
    Andrew Rojek is the Analyst for Strategic Consulting in JLL, based in Queensland, Australia.

    What about the smaller brands in China’s malls?

    October 15th, 2014 by Steven McCord

    When visiting shopping centres in Beijing and Dalian, our team makes thorough inspections of each property to gather insight into their strengths, weaknesses, and performance potential. The key driver of retail success is ultimately strong footfall, and we are looking at not only the number of people passing the main entrance of the mall within a defined short time period, but also the number of people carrying shopping bags and for which brands. While not an indication of conversion rate (shoppers into sales) per se, these figures are an indication of how many people have purchased a physical product and what they purchased. This is interesting because of the concern around show-rooming in modern shopping centres, as consumers turn to online storefronts to buy physical products.

    Few shopping bags are typically seen in the run-of-the-mill community and regional centres today, with the number of bags typically in the range of less than 5-10% of the total footfall figure. Most visitors to malls appear to be there for the food and beverage, children’s activities, or simply window-shopping. Furthermore, any bags observed almost always are from a small set of international fast fashion mini-anchors, with surprisingly few exceptions. If a mall has an H&M, for example, almost all of the bags seen tend to be from this one brand. This suggests that people who buy a physical product in these malls tend to focus on the big brands and are not making purchases from the many other, smaller brands in the mall. Unless, of course, one were to include the take-away bags from casual dining restaurant chains.

    This pattern even extends to the biggest of the destination malls in both Beijing and Dalian; large properties clearly offer a rich assortment of brands. And yet, customers are still only purchasing from a few big names. This may be because the mini-anchors have large, attractive stores in the best locations of the mall. These tend to generate more impulse buys and offer the opportunity to observe what others in these fashionable parts of the city are buying and to follow suit. Meanwhile, the small retailers are hurt as they seem to be bypassed. Borrowing a concept heralded by the hypermarkets in decades past, fast fashion could be called a “category killer.”

    Our regular inspections also revealed an interesting trend with the lack of vertical transportation in shopping centres. Customers wishing to use the elevators to directly reach the upper floors of a property are waiting an average of 32 seconds for an elevator, and sometimes as much as 99 seconds. Every mall inspected in Dalian unanimously had lifts that were too both small and too crowded. However, this has the unintended benefit of encouraging circulation throughout the property and the ability to stimulate more impulse purchases at smaller shops. Today’s shopping centres face a challenge of getting the massive F&B crowds and families with children to make impulse purchases to support smaller brands.

    About the author
    Steven McCord is Head of Research, North China, based in Beijing. He is also the lead analyst for the retail sector in China.

    Singapore planning– moving towards a more market driven approach

    October 13th, 2014 by Ansley Toh

    In my former capacity as an urban planner with the Urban Redevelopment Authority (URA) – the national planning agency, I witnessed changes in the procedures for obtaining planning approvals that made the application process more efficient and user-friendly. In my opinion, this is a step in the right direction as Singapore strives to improve on market transparency and responsiveness to the changing needs and preferences of the market.

    Since 1995, the national planning agency has given the private sector more autonomy to increase the efficiency of planning approvals. This refers to the introduction of the Plan Lodgement Scheme, which streamlines the approval process by allowing development work to be lodged without the need to apply for planning permission. This, of course, is subject to certain criteria and it works on a self-declaration system, where work is to be correctly declared by a “qualified person”, ie a registered architect or engineer. In 2001, this lodgement scheme was extended to include a change of use to facilitate the growth of business.

    With an increasingly complex planning environment, there is also more scope and opportunity for improvement. In the national planning agency’s attempt to provide more efficient services to both the public and professionals, Geographic Information System (GIS) has played quite a significant role.

    One good example is the inclusion of planning decisions onto a map-based registry known as ‘URA Maps’ in February this year. Previously, users had to pay a sum of SGD30 for a copy of the planning decision from the planning agency’s development register. Now, it is free and by utilising the GIS technology to build a map-based application, it enables easy access to planning decisions although the record is limited and only available from year 2000 onwards. The planning agency extended this map-based format in March to develop another platform called the Development Charge (DC) Sector Map service which allows users to easily pull out information on the DC Sector number and DC rates (a form of development tax) for a particular site. This move towards map-based services has made the development system more transparent and efficient.

    However, more can be done to facilitate the development approval process. Since it is difficult for the planning authority to prescribe all the allowable uses within a certain zoning given that the list of possibilities can be endless, it could consider doing an exclusionary list instead. This way, it will be easier for both the public and professionals to know what specific uses would not be allowed before any business decisions are made.

    About the author
    Ansley Toh is an Analyst for JLL Research & Consultancy, based in Singapore.

    Increasing demand for direct assets keeps transactional volumes climbing higher

    October 10th, 2014 by David Green-Morgan

    The inexorable demand for direct commercial real estate remains unabated as we head into the final few months of 2014. North America and Europe continue to set the pace while the slowdown in China means that Asia Pacific is likely to underperform the other regions in 2014.

    Q3 2014 volumes have risen by 13% compared to this time last year, to US$165 billion. All three regions are higher than last year but the Americas remain the standout performer with volumes 23% higher. On a year to date basis global volumes are even more buoyant at US$463 billion which is 23% higher than the first three quarters of 2013. The US$463 billion recorded at the end of 2013 is exactly the same amount as we recorded for the whole of 2012, a good demonstration of how quickly investment volumes and sentiment has continued to improve.

    The divergence in regional performance that we started to see earlier in the year has continued with Asia Pacific lagging behind its 2013 transactional volumes. Much of the slowdown can be attributed to the lack of transactional activity in China where Q3 2014 volumes are less than half of what they were a year ago and volumes are a third lower on a year to date basis. The environment in the other two large markets of Australia and Japan is more positive with year to date volumes in both markets higher than in 2013.

    Strongest growth in 2014 has been in the Americas, where the surging US market has been supported during the year by strong investor interest in Mexico and Brazil. The US passed the US$70 billion mark this quarter for only the second time since 2007 as transactional volumes across a range of prime and secondary cities climbed higher.

    A similar story is playing out in Europe where the peripheral markets of Southern Europe, The Nordics, Benelux and Central and Eastern Europe are all higher and lending substantial support to the big core markets of France, Germany and the United Kingdom who continue to grow. Although European volumes are only 7% higher than this time last year they remain on track to be over 25% higher than 2013 by the end of the year.

    With the positive sentiment around real estate improving we are maintaining our full year forecasts of US$700 billion for the full year. There are slight headwinds to this forecast with a resurgent US dollar meaning more deals will need to be done in Japan and the Euro Zone. Also, the final quarter of the year is traditionally the busiest, but with the number of deals looking to be executed it is possible that some may slip into the first quarter of 2015. However, we do expect the final quarter of this year to surpass Q4 2013 by some margin.

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

    The dynamic growth of Sydney’s satellite city

    October 9th, 2014 by Alison Spiteri

    The city of Parramatta serves as the commercial hub of Greater Western Sydney catering for approximately 92,000 workers from the region. Parramatta CBD alone caters for approximately 37,500 of these workers. The city has the second largest economy in the state of New South Wales, reporting a headline Gross Regional Product of AUD $16,416 million in 2013. As Sydney’s most important suburban office market, Parramatta has long been the beneficiary of New South Wales government decentralisation and corporate rationalisation initiatives, with many public sector departments and private financial institution back-office operations now located there. However, a recent increase in both population and residential development will result in a significant change to the profile of the city.

    The CBD currently caters for approximately 9,600 residents across 3,657 private dwellings. However dynamic growth is in prospect. Id Consulting, an urban advisory and planning business, forecasts population growth of 86% to 17,900 residents by 2021. Matching this population growth is a robust residential supply pipeline with approximately 7,550 medium-high density dwellings to be delivered to Parramatta over the next six years. More than half of these are in the advanced planning stages with 31% already under construction or with their contracts awarded, and a further 38% with plans submitted or approved by council.

    This supply pipeline will facilitate the evolution of Parramatta CBD into a more-rounded and liveable city for workers and their families, with the entire supply pipeline located within a 2km radius of the CBD centre.

    The city has a high level of social infrastructure with a sporting stadium, theatre, public pool, restaurants, medical facilities and an efficient public transport system. However with substantial population and housing growth, it currently lacks the necessary educational facilities. This is about to change.

    The University of New England already has a satellite campus in Parramatta and the University of Western Sydney is interested in a 26,000 sqm new office development at 169 Macquarie Street. However, the provision of primary and secondary educational facilities remains a problem. The Catholic Education office in Parramatta has recognised the shortfall within the city as they struggle to meet thriving enrolments while battling limited space. The problem is they have no more land on which to build.

    As such, now is the time to question if the 20th Century model of separate primary, secondary and tertiary educational facilities will meet needs of the evolving community. The Catholic Education office considers this not to be the case with plans to place schools in high-rise buildings and shopping centres in order to meet educational demands and minimise travel for parents. Additionally, several public schools in the area have presented as an opportunity to merge into one high density facility, whilst non-government schools are expressing their interest in the high density learning centres.

    About the author
    Alison Spiteri is the Research Analyst for JLL, based in Sydney, Australia.

    Can Residential REITs Succeed in India?

    October 8th, 2014 by Akshit Shah

    If I say that REITs are currently one of the most discussed topics in India real estate, it will not be an exaggeration. Since July 2014, when the government paved the way for REITs in India, it has had a widespread following, just like the flash sale of Xiaomi mobiles. Out of curiosity and professional interest, I was going through various documents on the topic. While doing some data crunching, one fact I came across was that 16% of equity REITs in the USA are residential REITs. The next moment, a question came to mind – Can residential REITs succeed in India?

    I believe the answer is NO, at least for the time being. For any investment option to succeed, it needs to provide returns higher than the opportunity cost. In the USA, residential REITs yielded an average return of 6.4% between 1994 and 2013, which is largely comparable to the return of 6.8% from office/industrial REITs. Further, ten-year US generic bonds have offered returns of 4-4.5% over the same time period, substantially lower than REIT yields, adding to the attractiveness of residential REITs in the USA. India is witnessing a contrasting scenario. While office assets are yielding an average return of 9-10%, residential assets yield 3-4%. The residential returns are considerably lower than even the risk-free 8.5% from ten-year government security bonds, making investment in residential REITs a no gainer.

    Then why is the gap between returns from both asset classes in India so large? The answer lies in the ownership pattern. In the case of office assets, as high as 89% of Grade A assets are leased versus only 11% owner-occupied, demonstrating the huge demand for leased assets and hence higher yields. Traditionally, residential assets have carried a high emotional value in India, and hence the majority has preferred to stay in an owned, rather than rented, apartment. In the absence of hard data, I believe more than 90% of residential assets in India would fall under the owned category. This high demand for owned apartments has led to the huge gap between capital values and rental values for residential properties, resulting in lower rental yields.

    Does that mean that residential REITs can never see the light in India? The answer is NO. Thanks to the ever-increasing capital values of residential properties in recent years, buyers have started to find owning an apartment less affordable. Further, in search of better job opportunities and lifestyle, the younger generation has become more mobile, and hence demand for rental properties is increasing. The government had started rental housing schemes, but did not meet with the expected success due to various reasons, such as high land cost, taxation policies and distance from business districts. While higher incentives for rental housing development coupled with an incentivised taxation system can take care of supply related bottlenecks, an increase in demand for rental apartments can lead to a reduction in the gap between capital values and rental values, resulting in increasing yields and a stronger case for residential REITs in India. So yes, residential REITs can succeed in India, but the change will be steady and will take at least another 7-10 years.

    About the author
    Akshit Shah is the Manager of Research and Real Estate Intelligence Service, for JLL in India, based in Mumbai.

    How multi-speed economic growth in Asia Pacific is impacting the retail sector

    October 3rd, 2014 by Lee Fong

    Asia Pacific continues to be a global leader…

    The region currently accounts for about one-third of the world economy and this is set to rise with forecast growth nearly twice as fast as the rest of the world from now till 2018. China and Japan are currently the world’s second and third largest economies after the United States. With forecasts for strong economic growth, more countries in AP will move up the rankings of the largest economies worldwide.

    …although there are regional variations

    In spite of strong economic prospects for Asia Pacific as a whole, growth will not be uniform across the region. There are two discernable groupings – developed and developing markets. Mature economies such as Australia, Hong Kong, and South Korea are expected to see average annual GDP growth of around 3% or nearly one-half that of the developing markets over the next five years. In the region’s largest developed economy, Japan, the government has moved forward with stimulus and reform measures in a bid to end two decades of stagnation. Although sentiment has improved since ‘Abenomics’ was initiated, uncertainty persists in some quarters as to the long term effectiveness of these measures.

    Figure 1: 5-year total real GDP growth forecast, 2014-2018

    Source: Oxford Economics, September 2014

    In emerging Asia, China and India continue to be market leaders supported by growing middle classes and rapid urbanisation. After three decades of double digit rises, China is in the midst of transitioning to a slower norm for growth as the government attempts to rebalance its economy to rely less on investment and more on domestic consumption. Private consumption in China accounts for 38% of GDP, well below large developed markets such as Japan (61%) and Australia (55%). In India, optimism improved following the election of the first majority government in 30 years on expectations that it would move forward with much needed structural reforms – e.g. overhauling strained public finances and rigid labour rules – and infrastructure investments. The new government is targeting USD 1 trillion of investment into infrastructure and has received strong pledges for funds from China and Japan in recent months but will need to remove “red tape” to reach its target.

    Elsewhere in AP, Southeast Asia is emerging as a regional driver benefiting from economic reforms and/or young populations (e.g. median age – Philippines 23, Indonesia 28). A shift to higher value-added manufacturing/services and a consumption-driven growth model should foster more balanced economies. The Philippines has been a recent outperformer with strength from a flourishing Business Processing Outsourcing industry while the sub-region’s largest economy, Indonesia, appears to be stabilising after a recent slowdown.

    Implications for retail real estate

    Strong economic prospects and favourable demographics will continue to see AP’s retail landscape evolve. A growing, wealthier consumer base will present many opportunities; however, retailers and mall operators are likely to be more selective about growth strategies as competition intensifies. In emerging AP, Tier 2/3 cities will gain prominence as retailer presence and shopping centre stock rise in major regional cities. Although regional trends will be evident, sub-regional and country-level differences will influence local strategies. For example in Jakarta, high occupancy in combination with limited supply due to a ‘mall moratorium’ is testing the traditional entry strategy of establishing a core location to build brand awareness before expanding elsewhere, as reported in JLL’s “Retail Cities in Asia Pacific”. In India, uncertainties surrounding FDI into multi-brand retailing are likely to see foreign retailers focused on single brand stores. Despite such challenges, retailers and mall operators will continue to be attracted to the region’s vast growth opportunities.

    For more research insights into the retail sector, please see:

    A Magnet for Retail: AP retailer expansion

    Redefining Retail Places: for information on global trends influencing the retail landscape

    Global: Discover how multi-speed economic growth is influencing retail real estate at a Global level

    EMEA: Discover how multi-speed economic growth is influencing retail real estate in EMEA

    About the author
    Lee Fong is a Senior Manager, Asia Pacific Research for JLL, based in Hong Kong.