Archive for October, 2011

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Perth: A Resources Boom

Monday, October 31st, 2011

The resources sector has been the driving force of the Western Australian economy for the past year. According to CommSec, Western Australia has the strongest economy in the country, with leading economic growth and investment. Western Australia had a 46.3% share of national export earnings in August 2011, and earnings are up by 26.6% over the year to August. In the last financial year more than 80% of WA’s export revenue was drawn from iron ore, gold, gas and liquid natural gas (LNG). More than 42% of WA’s export revenue is from China.

There are a record number of resource projects committed in WA, with forecast capital expenditure totalling more than $200 billion. Chevron’s $43 billion Gorgon LNG development is allocating $20 billion to local contracts. Chevron expects that 50% of the spending on their $29 billion Wheatstone LNG project will flow to Australian industry. Other projects in the pipeline include Inpex’s Ichthys gas field ($20.6 billion) and Woodside’s Pluto LNG ($14.9 billion). BHP Billiton is committed to 13 major projects with more than $36 billion in expenditure planned. Rio Tinto is a leading partner in nine major developments with more than $16 billion in expenditure planned. Some of these projects will operate for more than 30 years.

Companies’ preparing for these projects have leased a significant amount of space in the Perth CBD. In the past two years Chevron has leased more than 30,500 sqm, most of which is being used for the Gorgon project. Rio Tinto has leased more than 12,900 sqm, and BHP has leased more than 13,400 sqm.

In the 12 last months, major tenant moves by mining groups have accounted for 48% of the 60,700sqm of net absorption recorded in the Perth CBD (the 40 year average is 22,600 sqm). If engineering and construction firms that operate in the resources sector are included into the equation, this figure increases to more than 82% of the net absorption in the CBD. This illustrates the impact of the flow on effect from these resource projects. The Chamber of Minerals and Energy has forecast for every new job in the mining sector, there is a multiplier effect of four supporting jobs.

This strong demand has seen the vacancy rate in the Perth CBD fall to 3.2% to be the tightest major office market in Australia. Prime gross effective rents have recorded 20.4% growth in the past 12 months.

About the author
Hugh Peacock is a Research Analyst for Jones Lang LaSalle, based in Perth, Australia.

Posted in Australia, Office Research, Resources Sector | No Comments »

The Lucrative Kids’ Market in Hong Kong

Sunday, October 30th, 2011

October is the peak month for parents to prepare school applications and interviews. A recent news headline noted that, according to a poll, some 90% of parents believe that getting their child into a famous school is even more important than the election of Hong Kong’s Chief Executive! Well, I may not agree with this extreme mindset, but I do understand that a child’s education is a very high priority for parents.

Indeed, a recent MasterCard survey indicated that Hong Kong parents spend an average of 13% of their monthly personal income on their children’s education and around 88% arrange for their children to participate in at least one enrichment class. In fact, education is considered a necessity to many parents, with its importance to some of them perhaps even on a par with food and housing. I believe that, if a survey were to be conducted, most parents would say that a child’s education is one of the last things they would cut, even in a bad economy that affects their personal income.

Although the high value Hong Kong parents place on education has caused anxiety in today’s highly competitive environment, on the bright side, the stiff competition has offered retailers, service providers, and the landlords of shopping centres tremendous business opportunities. It is no longer headline news when parents spend a fortune on educational tools or put their baby’s name down for a playgroup with a long waiting list. The market has also seen an increasing trend for landlords of shopping centres to focus on the lucrative kids’ market. Windsor House and Whampoa’s Wonderful World are just two of the city’s core centres that have recently opened kids’ zones that focus on kids products, after renovations.

On the other hand, the education trade is particularly welcomed by landlords of non-core shopping centres to fill up vacant space with low exposure and limited traffic as this trade does not require these elements to promote business. Instead, education requires strong clustering to save parents time by allowing their children and their siblings to attend multiple different classes. Hence, the market has also seen many Grade B/C commercial buildings heavily weighted towards an educational trade mix.

Looking ahead, although signs point to a slowdown in Hong Kong’s economic growth over the next few quarters, I believe that the kids’ market, especially educational trade, will offer the commercial market sustainable leasing demand well into the future.

About the author
Cathie Chung is the Associate Director, Consulting in Jones Lang LaSalle Hong Kong.

Posted in Hong Kong, Retail Research | No Comments »

China’s Real Estate Development: A Long March

Wednesday, October 26th, 2011

China is expected to become the world’s largest economy by 2020, with nominal GDP surpassing that of the US. What will the commercial real estate landscape look like in this China of the not too distant future? A good place to start is to recap the evolution of China’s commercial real estate landscape in the past 30 years during different stages of economic development.

I have been fortunate to bear witness to this incredible transformation during my various visits to Beijing over three decades. My first visit to Beijing was in 1979 at the dawn of China’s “open door policy”. It was a shock adjusting from the bright lights of Hong Kong to a city of decrepit buildings and unlit streets filled with bikes, all signs of a country that had been isolated for decades. In 1990 and ten years since market reforms began, China was still very much a low-income country, there were almost no Grade A offices in the country, and no modern retail stock to speak of. The shopping experience was limited to state-owned department stores. In Beijing, China World Trade Center Tower I, a few luxury hotels and their retail podiums were the only modern additions to the city landscape.

As recently as 2000, in tandem with average income levels growing to equal those in Indonesia and the Philippines, China’s commercial real estate development was still in the in the early stages. There was a small amount of Grade A office stock and may be a few modern shopping malls in the Tier I cities – though these began to resemble the lower grade stock in Hong Kong, with a lot more being built or planned. In 2011, and arriving at the doorstep of middle-income status, China now has a large Grade A office and modern retail stock in the Tier I cities and a huge construction boom in the Tier II cities. In Beijing, infrastructure improvement leading to the 2008 Olympics has transformed the skyline and the CBD has begun to acquire a first-world look and feel.

Fast forward to 2020 and China will have firmly achieved middle-income status. Due to labour shortages and rising wages/costs, it will be undergoing or have partly gone through the same economic transformation that Hong Kong, Taiwan and South Korea experienced before. Much of the low-value added manufacturing activity would be relocated either further inland to the central and western regions or to the rest of emerging Asia. As it moves up the value chain, coastal China (with the Pearl and Yangtze River Deltas as its nerve centres) will likely become the hub of an even more complex international trading network, with China itself producing many of the components that it now imports from more advanced countries, while inland China, along with countries in South or South East Asia will take over the more labor-intensive processes. To facilitate this intricate manufacturing network, a lot more modern logistics facilities will be needed.

As well as the development of warehouses, major Tier I and II cities (e.g., Guangzhou, Shenzhen, Xiamen in the south, Shanghai, Hangzhou, Nanjing in the east, Beijing, Tianjin, Dalian up north, Chengdu, Chongqing, Wuhan further inland) should increasingly house the headquarters and ancillary offices of large trading/manufacturing companies (both domestic and MNCs), as well as the financial, professional and government services that support them. With 150 million more city dwellers in China between now and 2020, and with real income levels at least double their current levels, more will desire and demand the shopping experience that they see in the likes of Beijing, Shanghai and Hong Kong. All this points to huge potential demand for additional office and retail space in the Tier II cities nation-wide.

Marveling at the view from our brand new office in the new China World Trade Center Tower III on a recent visit, and looking back at the incredible transformation so far, I believe that the stage is set for an even more exciting chapter for commercial real estate development in China, and we in the Asia Pacific have the best seats.

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

Posted in China | No Comments »

High Streets – Shopping the Indian Way

Monday, October 24th, 2011

It is now the festive season in India and, like most Indians, I am on a shopping spree. When it comes to shopping, I like both high streets and malls, depending on the product I want to buy. But does all of India think the same way? Has the arrival of swanky malls dimmed the lights of high streets in India? The answer is “no” – from both customers and retailers.

India has traditionally been known for its bazaars and fairs, and every Indian city or town has its own well-established shopping high streets in prime locations near prime residential catchment areas and public nodes such as railway stations and central business districts that still enjoy high footfalls even today. However, high streets have witnessed a sea change over the past decade as international, national and local brands have slowly replaced most of the traditional stores. The location and catchment advantage that high streets enjoy continues to be the prime driver of demand among retailers, with the country’s leading retailers, such as the Future Group, Reliance Retail and Trent Ltd, expanding aggressively in the high streets of towns and cities across India.

These and other retailers have changed the face of most Indian high streets. The cluttered and disorganised high streets have been replaced by new or refurbished retail spaces with modern facilities, such as valet parking or parking bays. In addition to the advantages noted above, high streets tend to offer low rents compared to malls (although not always – Khan Market in Delhi and Linking Road in Mumbai demand high rents as compared with the malls in the city) and high visibility. However, the stores on high streets provide more efficient spaces with low incidental costs such as Common Area Maintenance charges. They have also been the prime real estate strategy for retailers seeking to enter the non-metro areas of India, which remain largely untapped and have less development of organised mall spaces.

India’s non-metro towns and cities are dominated by traditional high streets that are usually located in the central area. The retail stores on these high streets are usually located on the ground and first floors of properties along the major roads, and do not offer such standardised facilities as parking and central air-conditioning. However, as consumers’ preferences change, so high street retail properties are also upgrading their facilities to entice customers by providing more facilities.

High streets remain the flair and flavour of the Indian shopping experience and Indian shoppers still prefer high streets – along with some malls – for their shopping and entertainment, especially in the non-metro areas. Retailers tend to focus on value and convenience, and all major retailers perceive promising opportunities in both metro and non-metro cities due to increasing purchasing power of the Indian consumer. High streets therefore provide the best alternative when seeking to tap an opportunity in the absence of malls.

About the author
Trivita Roy is the Manager of Research and Real Estate Intelligence Service for Jones Lang LaSalle in India and is based in Hyderabad.

Posted in India, Retail Research | No Comments »

Livability & Economic Activity – An Unusual Combination

Sunday, October 23rd, 2011

According to the Economist Intelligence Unit (EIU), I now live in the world’s most livable city. It may not have the culture of Europe, the bright lights of Hong Kong, the weather of Queensland or the beaches of New South Wales – but Melbourne ranks as number one on the EIU’s livability index.

Questions will always be asked of livability surveys in terms of methodology, weightings and criteria. I myself query the pertinence and value of such research. That being said, there is no doubt that Melbourne does in fact have a very high standard of living. It is the purpose of this blog to outline the unique position of the city.

An indication of the quality of life enjoyed in Melbourne can be gauged by the population growth over the past decade. Over the 10 years to 2010, the population of Victoria (of which Melbourne is the capital) grew by over 800,000 people. Over the same period, the state of Victoria has accounted for 25.4% of the national population growth despite only accounting for 23% of national output. Furthermore, Victoria now has a positive net balance of interstate migration which is a large turnaround from the mid 1990’s where Victoria was losing residents to the other states.

So the question remains…why is Melbourne doing so well? Firstly, the city has been beneficiary to a steady release of residential land on the urban fringe, giving the city affordable housing options within the metropolitan area. Secondly, Australia has two commercial hearts – Sydney and Melbourne – and has afforded Melbourne with significant employment opportunities for skilled migrants. In fact, twenty of the companies that make up the S&P ASX 50 are headquartered in Melbourne.

Melbourne’s combination of livability and economic activity is unique. Over the next 10 years, Deloitte Access Economics project a further 820,000 people will live in Victoria, taking the total to around 6.4 million. Population growth will continue to drive residential housing investment in Victoria. Strong population growth will also flow through to the demand for retail floorspace, industrial warehouses and office accommodation.

The future for Melbourne is positive – the issue is there is only one way to go from number one. The EIUs livability report stated that one major area for improvement was the city’s prevalence of petty crime. Another area that will come under pressure will be the public transport infrastructure. The state will have to address these issues and remain proactive in terms of maintaining and increasing the scope of the public transport infrastructure. There will also need to be provision for new infrastructure within the urban growth areas which is where a high proportion of the population growth is expected to be accommodated.

About the author
Nicholas Wilson is a Research Analyst for Jones Lang LaSalle, based in Melbourne, Australia.

Posted in Australia, Demography, Economic Research, Standard of Living | No Comments »

Loosening or tightening in the China housing market?

Wednesday, October 19th, 2011

On the morning of 11th October 2011, the city of Foshan, a third tier city located next to Guangzhou, announced that it would ease home purchase restrictions. The news quickly spread across the country within a few hours. However, later that same day, the relaxation was cancelled after the local government “took the impact of the easing into consideration”. This dramatic U-turn confirmed our view that the Central government can probably afford to wait three to six more months before market conditions compel them to begin loosening policy. This is because the current tightening policies have only recently started to achieve the desired result of taming price growth. Many second tier cities in the Yangtze River Delta region witnessed some meaningful price corrections in the past three months, while cities in northern and western China posted much slower price growth as illustrated below.

Figure: High-end Residential Capital Value Clock, 3Q11

Note: The concentric circles represent Jones Lang LaSalle’s assessment of the volatility and maturity of the residential sector in each of the respective markets.

Despite the discounts or other incentives offered by developers, most of the eligible buyers chose to remain on the sidelines and wait for further price corrections. Many other buyers remain blocked from the market due to the purchase restrictions. Total residential sales volume for the 19 cities (excluding Chongqing) in the above figure posted a further slide of 2% q-o-q or 26% y-o-y in 3Q11. With sales remaining weak and access to bank loans getting harder even at higher interest rates, developers will only get more anxious before getting any better. Given the current policy stance, it seems inevitable that the housing price decline will broaden as more developers will have to cut their sales price in order to spur sales in the upcoming 3-6 months. Nonetheless, cash-rich developers and institutional investors are being presented with more investment opportunities to pick up some distressed projects in the residential market. Such opportunities nearly disappeared in 2009 and 2010 when bank loans were easy to access and residential sales were strong.

About the author
Joe Zhou is the Local Director for Jones Lang LaSalle in China, based in Shanghai.

Posted in China, Residential Research | No Comments »

An Island South Office Node

Tuesday, October 18th, 2011

Earlier this year, the Government announced plans to promote the development of Wong Chuk Hang as a new commercial office node on Hong Kong Island. This led some to ponder the type of office market that would eventually emerge in Island South. Armed with an abundance of redevelopable land and a future MTR rail line, the new office node is being promoted as being only two stops from the CBD and a competitor to Hong Kong East. By our estimates, the redevelopment of existing industrial buildings could yield about 10 million sq ft of commercial office floor space, which would put it on par with the current size of the Tsimshatsui Grade A office market.

However, unlike the city’s two other non-core office markets, Hong Kong East and Kowloon East, Wong Chuk Hang lacks a clear lead developer to help drive the development process. Rather, what currently exists, is a fragmented ownership base with differing economic rationalisations behind redevelopment. Without a lead developer, the potential to develop a cohesive commercial office district within a reasonable timeframe will be challenging.

Moreover, a large number of the potential redevelopment sites are relatively small by modern commercial Grade A office standards. The fragmented ownership base will make it difficult to amalgamate sites for larger scale developments. Land premiums in the area are also expected to rise considerably after the high sales prices achieved at One Island South, a new Grade A office building completed earlier this year. Faced with higher land premiums, some developers may opt to build industrial office buildings for office use rather than Grade A quality offices.

Hence, while the potential exists to develop a new commercial office node in Wong Chuk Hang, the type of office product that is initially built, may not necessarily be to a standard that will be able to directly compete with the Island’s other more established office markets.

About the author
Denis Ma is the Local Director for Jones Lang LaSalle in Greater Pearl River Delta, based in Hong Kong.

Posted in Hong Kong, Office Research | No Comments »

Chasing Risks in a Changing World

Monday, October 17th, 2011

“Risk, I learned, was a commodity in itself. Risk could be canned and sold like tomatoes. Different investors place different prices on risk. If you are able, as it were, to buy risk from one investor cheaply and sell it to another investor dearly, you can make money without taking risk yourself.” – Michael Lewis in Liar’s Poker.

Peter Bernstein says that risk is one of the prime catalysts driving Western Society. The magnitude of interconnectedness in today’s world implies that occurrences that take place in one part of the world more often than not traverse to the other extreme end, albeit with a time lag. This ‘Butterfly Effect’ has ensured that risk stands to be a crucial catalyst maneuvering Asian economies as well. Risk appetite does, however, vary drastically from one investor to another, and one economy as a whole to another. The theory of decoupling has not proved to be wholly accurate. It was initially perceived that the Asian markets were unscathed by the mayhem in the financial markets of the advanced economies, a while ago. However, there were a number of channels that transmitted this mayhem from the West to the Asian economies, one of them being the colossal reversal in the flow of capital.

Asian economies have been traditionally viewed as not having large direct exposure to securitized assets that are associated with high-risk lending. However, there are certain elements of risk omnipresent in real estate as an asset class worldwide. These include financial risk. The use of debt financing by investors amplifies the business risk associated with real estate. However, the degree of financial risk is dependent on the cost and structure of the debt. Liquidity risk is more pronounced in those markets where many buyers/sellers are not readily available. Liquidity risk heightens the possibility that the seller might have to give the buyer a price concession should the need to dispose off the investment quickly arise. Real estate investments, particularly, can bear high liquidity risk due to the large transaction size, policy constraints such as repatriation to foreign investors and information asymmetry due to low transparency. Special purpose properties would showcase a higher level of liquidity risk than those that can be easily modified for alternative uses.

It is interesting to note that real estate as an asset class has been considered to offer somewhat of a hedge against inflation. In spite of the presence of inflation risk, real estate has historically done relatively well than other asset classes during periods of inflation. Management risk is high in real estate. To that effect, the rate of return that the investor earns can be directly proportional to the competency of the manager. Some properties, however, contain a higher level of management risk than others. For instance, malls would require a viable mix of tenants to ensure strong footfalls and in order to attract a viable mix of tenants, proper mall management is indispensable. Interest rate risk is ubiquitous across all asset-classes. In real estate, in particular, even if an existing investor has a fixed rate mortgage or no mortgage, an increase in interest rates might lead to a fall in the bid-price a potential buyer is willing to pay. Apart from these, real estate is also subject to legislative risk and environmental risk. Legislative risk results from the fact that changes in regulation can adversely affect the profitability of the investment.

In the rapidly changing global real estate environment, the concept of considering potent risk when analyzing investments has assumed new importance. In the past, when investors were looking at the public or private real estate markets, increased emphasis was placed on trading values that were derived from exaggerated future cash flows, rising rents and a positive outlook in general. Today, more and more deals are scrutinized with a far more prudent outlook. Investment risks are being factored using methods such as sensitivity and scenario analyses. In an interconnected world such as ours, uncertainties are rife. Apart from intrinsic risks specific to regional real estate markets, there are always those ‘black-swan’ event risks that might hound markets on the other side of the globe but would create a ripple effect throughout.

About the author
Ankita Satnaliwala is the Senior Analyst, Research and Real Estate Intelligence Service for Jones Lang LaSalle in India., based in Kolkata.

Posted in Asia Pacific Economy and Property Markets | 1 Comment »

Shifting Sands

Thursday, October 13th, 2011

While Hong Kong and Singapore vie for top places in regional and global rankings, multinationals are turning their gaze, and wallets, to alternate locations in an attempt to avoid skyrocketing prices.

When polled during a recent Jones Lang LaSalle webinar, the majority of occupiers preferred emerging tier one cities such as Shanghai or Mumbai for their next real estate activity. Listen to the recording or read the press release of the latest ‘Timing is Everything’ webinar.

Many Asian domestic companies remain attached to the ‘Pearl of the Orient’ and the ‘Lion City’ provided they can afford the soaring market prices, but companies headquartered in other regions are keen to rent or buy in the emerging tier 1 or 2 cities (Figure 1).

Figure 1: Occupiers, where will your new activity (buying or renting) principally be?

Source: Jones Lang LaSalle poll response obtained during ‘Timing your next move’ webinar, September 2011

Market sentiment suggests Asian countries won’t be immune to current global economic uncertainty and decelerating growth, but they should fare better than their Western counterparts. China and India remain the forerunners or ‘economic engines’, while smaller, fast-growing Asian markets remain optimistic.

Investing in alternate locations could prove timely and pay dividends for retail, manufacturing and service companies. There is much to capitalize on – rent is affordable, the expanding middle class provides an educated workforce that is relatively inexpensive to hire and retain. Infrastructure is improved, or in the process of being improved, while many governments offer incentives to businesses. Best of all, these up and coming cities offer maturing property markets.

The one-third of EMEA and US occupier respondents who cited tier 2 cities as their preferred real estate location demonstrates multinationals within Asia could be showing increased granularity moving forward.

That is, unless new regional hubs emerge alongside Hong Kong and Singapore?

About the author
Anne Thoraval is the Head of Corporate Research for Jones Lang LaSalle in APAC, based in Singapore

Posted in Corporate Real Estate | No Comments »

Tourism 101 in the Philippines

Wednesday, October 12th, 2011

The growth of the tourism sector in the Philippines in the recent years prompted renewed interest in tourism-related property developments. The tourism industry accounted for approximately 5.8% of the country’s Gross Domestic Product (GDP) and expenditure on tourism-related activities accounted for approximately 14.5% of the final household consumption expenditure in 2010. International tourist arrivals grew about 6% per annum for the last 10 years and are projected to expand by more than 5.71 million by 2020, according to the UNWTO.

This growth is welcomed with an unprecedented level of future supply of hotel rooms in Metro Manila, the country’s financial and tourism capital. From 2H11-2015, there are approximately 10,000 hotel rooms expected to be completed, of which approximately half is configured to serve the business and budget-conscious travellers.

However, Metro Manila is not the only destination in the country, which is teeming with natural wonders and attractions that could possibly be developed into high-growth tourism regions. Traditional domestic destinations include Camarines Sur, Cebu, Davao City, Cagayan Valley, Baguio City, Boracay Island, Zambales, Puerto Princesa City, Bohol, Negros Oriental, Camiguin Island and Ilocos Norte, which are well-connected with Metro Manila.

However these areas are lacking in supply of hotel developments that could cater to the business travellers and, most importantly, the burgeoning budget-conscious tourists and the domestic tourism market. The reason is that investors tend to converge in Metro Manila due to the high quality infrastructure, ample supply of supporting developments, and overall high-connectivity to the business and tourist markets.

We are glad that the government has recently set out an integrated and sustainable National Tourism Development Plan (NTDP). The NTDP aims to implement development framework that will enhance market access and connectivity to high-potential tourism growth areas, by introducing key infrastructure projects and incentive programs to further attract investors.

It is surely welcome news that the government is set to implement an action plan that will not only entice investors but also ensure the sustainable development of the natural and enhanced wonders of the country. In addition to developing the tourism sector, the government could also encourage more accountability and enhance the transparency in the investment property market to attract more investors.

About the author
Claro Cordero is the Head of Research, Consulting & Valuation Advisory for Jones Lang LaSalle in Philippines.

Posted in Hotel Research, Investment Research, Philippines | No Comments »

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