Archive for December, 2011

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Still Plenty Of Reason For End-of-year Cheer In Asia Pacific

Thursday, December 22nd, 2011

As we head into the end-of-year festive season, will there be much to celebrate on the economic front?

The global mood has become decidedly gloomier over the last few months. Casting our minds back to the beginning of the year, the world economy was expected to grow by around 4% in 2011 and Asia Pacific by over 5%. Well it now looks like global growth for this year will only be about 3% with the US economy turning pretty sluggish and Europe perilously close to recession. Here in AP, growth expectations have also been shaved to around 4.5%, proof of our linkage to the rest of the world. Across the region’s property markets we’re also seeing momentum starting to slow, with some markets – notably Hong Kong and Singapore – already seeing some declines in rents.

So looking ahead, the first few months of 2012 could be quite challenging. But here in AP we should not lose sight of the region’s strengths – government policy flexibility, a competitive cost base, ongoing urbanisation and other structural drivers – that will help the region to bounce back from global economic storms and increase its attractiveness over time to both investors and occupiers. Barring an economic meltdown in the West, we still expect rents and prices to increase further in most markets during 2012 (residential being an exception), although the rate of growth is very likely to slow from the pace we’ve seen over the last year or two.

So there’s still plenty of reason for end-of-year cheer here in AP!

The research team hopes that you’ve enjoyed our new blog series. Do send us your feedback on our blogs and topics you would like to know more about. We’re taking a short break until 9th January, so until then, enjoy the festive season and best wishes for 2012.

About the author
Dr Jane Murray is the Head of Research, Jones Lang LaSalle Asia Pacific.

Posted in Asia Pacific, Asia Pacific Economy and Property Markets, Economic Research | No Comments »

India’s Efforts To Weather a Quasi-downturn

Wednesday, December 21st, 2011

Contracting industrial output, rising inflation rates and slowing GDP growth –India’s growth story currently seems threatened due to weak macro-economic fundamentals and the free-fall of the Indian rupee has added another dimension to India’s woes. Industrial output contracted by 5.1% y-on-y this October, and the government’s forecast for 2011 GDP growth has also been scaled down to 7.25-7.75% from 8.0% a while earlier and 9.0% before that. Meanwhile, inflation soars high at approximately 10%. The proxy for investment rate, the Gross Fixed Capital Formation (GFCF), has exhibited a severe decline in growth. India today finds itself precariously balancing over a stagflation rut. Where do property contractors stand in the midst of all this mayhem? Property contractors have had to face challenges such as escalating material costs and transportation charges due to rising crude prices, rising costs of imported materials due to the depreciating rupee, as well as fewer project sanctions and diminishing source of finance from banks and other non-banking financial institutions. The contraction in industrial output, coupled with a higher interest rate regime, has also made the cost of borrowing steeper. The question on everyone’s mind now seems to be – where is India heading from here? A skeptic might say that the current situation may still worsen in the coming quarters. However, let us take a look at the new realities that exist today, because India is currently undergoing some significant changes.

At the offset, it must be borne in mind that these different macro-economic fundamentals are closely linked, not only with each other but also with those forces that shape global commerce. Where India is concerned, we see that initially global investors were pouring capital into nascent markets on the basis of the theory of decoupling, and the idea that these emerging economies are capable of withstanding weaknesses in developed countries. This theory has not proved to be wholly accurate. It has also demonstrated that these nascent economies sometimes take a bigger hit because their basic underlying fundamentals are not as resilient. On that note, we see that it is not just the INR but currencies worldwide have been affected as investors fret over the health of European countries.

That being said, the Indian government has undertaken a number of policy initiatives to set right the current scheme of things. The RBI has put into practice various measures to bolster the rupee such as dropping the net amount of U.S. dollar-versus-rupee trade that sanctioned foreign-exchange dealers can hold. Another measure is to limit the amount of currency hedging by importers, especially those who typically buy dollars. Within the purview of the Indian real estate industry, new projects, in all probability, would be stalled for a while as most contractors would turn their attention towards the successful completion of existing projects. Added to this, Indian banks are now approaching project financing more cautiously than ever before. Even if the lender is willing, the terms are now onerous. Supporting documents are now called for in advance as banks try to ensure that the money goes into the right hands. There is a stringent verification process in place including cross verification of documents with local authorities. In the midst of wavering macro-economic fundamentals, the risk associated with the property market has also gone up and, in general, cash has emerged as the definite preference. The volatility and uncertainty that pervades the investment climate has made investors seek a safe haven in cash. However, commercial property will re-emerge as a favoured asset class once India weathers this quasi-downturn. Lastly, India is still well placed in terms of risk v/s reward situation compared with the mature economies and other emerging economies. Furthermore, in spite of its fluctuating fundamentals, India’s status quo would seem attractive to foreign investors on the hunt for bargains.

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, India | No Comments »

Improving Investment Fundamentals

Monday, December 19th, 2011

The investment climate for the Philippines has been exhibiting improving fundamentals over the last few months. The improvement in investment conditions has benefited the local property sector as foreign and local businesses become increasingly confident in injecting funds into the system in order to sustain growing demand for office space, residential condominiums and hotel developments.

Recently, Standard & Poor’s raised the outlook on the Philippines’ sovereign debt from “stable” to “positive”, thereby boosting the country’s chances of getting a credit rating upgrade next year. The Philippines also ranked six places higher in the Global Financial Development Index 2011 released by the World Economic Forum (WEF) last week. The index, which ranks 60 countries, measures and analyses the factors affecting the financial system and the development of the capital market. These recognitions bode well for attracting more foreign investment capital into the Philippine property market.

Furthermore, the Philippine economy has shown resilience for quite some time, as exhibited by the stable and positive outlook in Gross Domestic Product (GDP). Much of the growth for the Philippine economy is expected to come from the solid growth of personal consumption and government spending. Personal consumption is fuelled by strong remittances from overseas Filipinos, and fiscal spending hinges on the implementation of public-private partnership infrastructure projects that are expected to materialise from 2012 onwards.

However, while the fundamentals for creating a favourable investment climate are taking shape, challenges lie in the ability of the stakeholders to sustain this growth momentum. There are clear economic and business challenges in the near-to-medium term, which are linked to the movements of global economies still reeling from the effects of the recent global economic slowdown.

While the Philippine investment environment remains vulnerable to external business threats and disruptions, the market can be further strengthened through monetary controls and more prudent implementation of pump-priming activities to ensure the domestic economy is sufficiently protected from these external shocks.

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

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

Could It Be ‘Game On’ For Aussie Shopping Centres?

Thursday, December 15th, 2011

In November the Productivity Commission released a report titled Economic Structure and Performance of the Australian Retail Industry. The inquiry recommends a number of significant changes to Government policy. Two key recommendations have implications for the property industry:

1. To relax planning regulations to allow more retail development;
2. Fully deregulate retail trading hours.

These are potentially important regulatory changes for owners of Australian shopping centres. It has been argued the restrictive planning has been an important contributor to the strong performance of regional shopping centres over the long term. Over the past 20 years specialty retail rents have grown at approximately 0.5% p.a. ahead of inflation. This rise in real rents has been linked to the limited availability of retail space arising from restrictive planning regimes.

As always, when the rules of the game change there are both winners and losers. Some centre owners will benefit from the changes while others will not. Similarly, the impact on retailers themselves may be complex.

An increase in supply may be a double edged sword for retailers. On one hand they may benefit from lower rental costs, but on the other they will likely face increased competition both from expanding domestic retailers and the arrival of new international retailers. One of the main hurdles for international retailers seeking to expand in Australia is the high cost and limited availability of suitable sites.

Western Australia is the State that currently has the most restrictive regulations in terms of planning and trading hours. Most retail centres are not permitted to trade on Sundays unless they fall within ‘special trading zones’, of which there are only five across metropolitan Perth. These specified zones exclude some of Perth’s largest regional shopping centres (‘Regional’ is the largest retail format in Australia, not a geographical category). Western Australia also has net lettable area limits in place. It is currently 80,000 sqm in the case of regional centres. So, it seems Western Australia would be the State most affected by the proposed regulatory changes.

The Productivity Commission, it seems, intends to attack high occupancy cost ratios for tenants from both sides of the equation. The aim of increasing supply/competition is likely an attempt to reduce rental growth pressure, and by deregulating trading hours they also attempt to simultaneously increase retail turnover. If adopted, the recommendations will almost certainly widen the performance gap between the strong and weak retail centres, a trend which has become increasingly evident during 2011 as a result of weak consumer spending.

Either way, if these changes are adopted we could expect a healthy increase in retail construction activity.

About the author
Andrew Quillfeldt is a Forecasting Analyst in Jones Lang LaSalle Australia, based in Sydney.

Posted in Australia, Commercial Property, Consumer Spending, Retail Research | No Comments »

Watch The Banks

Wednesday, December 14th, 2011

It has been no surprise that banks emerged as the corporate real estate (CRE) trendsetters amid our wobbly global economy. As the first to enact massive headcount cuts a couple of years ago, many banks were left with unoccupied offices, frequently in prime downtown spaces.

Having recovered their grasp on growth with a focus on Asian and Latin American developing markets, financial institutions are no longer occupying office space in the traditional way.

Banking and finance CRE executives’ responses to our inaugural Global Corporate Real Estate Survey 2011 show that they are doing more (and anticipating further) strategizing with their company CEOs and other C-suite officers.

They were especially fervent about tactics that support flexibility, geographically tailored solutions (as what works in Europe, the US or Australia may not work in Asia), alternative/mobile workplaces, CRE partnerships and more scalable leasing arrangements.

These trends are here to stay as banks and other financial organizations are entirely committed to smart, flexible growth. That entails facilitating growth where needed while right-sizing real estate portfolios and optimizing owned or leased space elsewhere.

Responding to the smart growth imperative and to higher C-suite expectations, CRE executives are increasingly empowered to take a lead role in executing these strategies. This involves challenging the status quo—not always easy when it comes to persuading top executives that they no longer need that spacious room with a view.

Banking and finance companies continue to be the trendsetters in corporate real estate. You may not be working with a bank, a securities house or a finance company. You may not plan to in the near future. Yet, even if none of these trends intrude on your work or thoughts right now, three years from now, you might be thinking differently. Watch the banks.

Read more in Jones Lang LaSalle Trends in the Banking and Finance Sector – Global Corporate Real Estate Survey 2011.

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 »

Reverse Or Fine-tuning In Policy?

Monday, December 12th, 2011

Recently there have been many news articles reporting that the current home purchase restrictions (HPRs) are scheduled to expire at the end of this year in 11 Chinese cities, including Suzhou, Qingdao, Jinan, Fuzhou, Xiamen, Hefei, Changchun, Nanning, Shijiazhuang, Haikou and Guiyang.

Last week, I had the opportunity to visit Suzhou and see several high-end residential developments. Although the projects’ sales rooms were all quite quiet during my visit, developers were not offering any higher discounts than three months ago as they were all quite optimistic and expected a strong recovery in sales volumes in 2012. A key reason for this optimism is that Suzhou’s HPRs are scheduled to expire at the end of this month, and so far there hasn’t been any official announcement that HPRs will be extended into 2012.

With revenues from land sales falling sharply compared to the past two years, some local governments such as Foshan and Chengdu have attempted to loosen tightening measures and revive the residential market, partially in order to boost developers’ appetite for new land acquisitions. So far, the Central government has not allowed the local governments to reverse the tightening policies, and we maintain our view that the Central government will not prominently reverse its residential market policy in the near term until market conditions compel them to do so. However, we expect that when the government begins to loosen policy, likely in the first few months of 2012, any changes will only be policy fine-tuning. The government is in particular likely to try to improve the affordability for first time buyers, as evidenced by the Beijng and Wuhan local governments recently redefining ordinary homes and broadening coverage for the preferential deed tax treatment.

About the author
Joe Zhou is the Head of Research for Jones Lang LaSalle in Shanghai.

Posted in China, Residential Research | No Comments »

Marina Bay – Singapore’s Canary Wharf?

Sunday, December 11th, 2011

Having watched the Marina Bay area evolve into a new office hub in Singapore’s CBD over the past few years, it started me thinking about cities around the globe where such large scale redevelopments have taken place and, being a Londoner at heart, the obvious comparison for me was Canary Wharf.

The redevelopment of Canary Wharf started in 1981 with the formation of the London Docklands Development Corporation, tasked with regenerating the former docks, which were at one time the largest and most successful in the world. With the entire Docklands area covering an area of 8.5 square miles and bridging three London boroughs, Canary Wharf itself was just a small part of the overall regeneration of a rundown area of East London. Master-planned by Skidmore, Owings & Merrill, construction started in 1988 with the first buildings completed in 1991 including the centre piece One Canada Square, a 50 storey office building at the heart of the development which is the tallest building in Britain.

After original owners Olympia & York filed for bankruptcy following the collapse of the London commercial property market in 1992, Canary Wharf Group took over the development in 1995 and continued to grow the estate, transforming it into a successful commercial centre popular with financial and professional services companies with many, including Barclays, HSBC, Citigroup and Clifford Chance now housing their world or European headquarters on the estate. Now under the ownership of Songbird Estates plc following a takeover in 2004, there are some 15 million sq ft of office and retail serving the 93,000 people who work there. Even after more than 20 years of redevelopment, the estate keeps on growing with major projects such as Wood Wharf, which will provide around 5 million sq ft of office space, in the pipeline. After a slow start and patchy history, including takeovers, terrorist attacks and several economic downturns, Canary Wharf remains a benchmark example of an inner city regeneration project.

By comparison, the New Downtown Marina Bay area in Singapore is in its infancy but many similarities can be seen between it and Canary Wharf. Marina Bay is located on an area of reclaimed land which was formerly the Telok Ayer Basin. Covering 360 hectares, once completed the New Downtown will comprise nine office buildings providing some 7 million sq ft of office space, 100 hectares set aside for Gardens by the Bay and the 3.5km Marina Promenade. An extension of the existing CBD at Raffles Place, the Urban Redevelopment Authority envisage the area will become one of the world’s financial centres, attracting financial and professional services companies to Singapore. Developments such as Asia Square, Marina Bay Financial Centre and One Raffles Quay have already attracted large multinational companies including Standard Chartered Bank, Barclays Capital, Citibank, and Clifford Chance. With more sites, including the Marina South white site, due to be redeveloped over the coming years, the regeneration of Marina Bay will continue to transform it from its origins under water to a globally recognised financial centre.

About the author
Claire Gent is Singapore Research Manager for Jones Lang LaSalle.

Posted in Office Research, Singapore | No Comments »

Back To Basics

Friday, December 9th, 2011

We’ve just finished reporting to our subscription based clients of our Real Estate Intelligence Service on the five year outlook of the real estate markets here in Asia Pacific and things are not looking bad. It’s true to say that Hong Kong office and residential sectors have seen prices start to fall, but given its currently the most expensive place to own property, and the fact that rents in Hong Kong have now surpassed those of London and Tokyo in the current environment, it’s little wonder there might be a little wiggle room on the downward direction somewhere along the way, but it’s far from time to panic.

Elsewhere, however, we’re being told that in terms of the economic environment, more downside risks have emerged. Economic forecasters have downgraded the GDP number for AP for 2012 from 5.9% to 5.4% and this was then followed last week by the release of the China Purchasing Managers Index number, now down to 49.1 indicating a contraction in manufacturing output of the regions largest economy. This is the lowest level since March 2009, so we in AP are clearly seeing the short term rippling effects of the sovereign debt crisis in Europe and slowdown in America reaching our shores.

Will there even be a Euro by the time I post my next blog next year?? Certainly not if the front cover of the last edition of The Economist is anything to go by with the image of a meteorite 1 Euro coin with the headline “Is this really the end?” is anything to go by!

When it comes to Asia Pacific or any other region or market for that matter, it always, always pays to get back to basics and to look at the long term fundamentals. And the fundamentals look very good here, very good indeed. We’re already producing 15 million new graduates every year, that’s nearly three times the amount of the US and Western Europe. We’re also home to 8 out of 10 of the worlds largest ports and within the next ten years, Asia Pacific will be home to the world’s largest economy, China. Meanwhile India will be the most populous country on the planet. By 2030 Asia Pacific will be home to 66% of the world’s middle class population, that’s 3.2 billion consumers and by then, I’d risk hazarding a guess, that half of the Fortune 500 will be Asia Pacific companies.

In the last 20 years we’ve seen the total Grade A office space in Asia Pacific grow from 15 million square meters to 70 million square meters. Given what I’ve outlined above regarding the growth of the region, it’s little wonder we’re going to see 35 million square meters of additional space added to that in the next 4 years just to cope with demand.

Undoubtedly, what’s happening in Europe has and will impact AP, but nothing gets away from the fact that this is, and will remain, the higher growth region to be investing in long term. Whatever bumps and scrapes we encounter along the way, I know where I’d be investing – exactly the region I’m sitting in now!

About the author
Roddy Allan is a Director, Asia Pacific Research for Jones Lang LaSalle, based in Hong Kong.

Posted in Asia Pacific, Asia Pacific Economy and Property Markets, Investment Research, Office Research | No Comments »

Out With The Old – The Other Side Of The Construction Cycle

Wednesday, December 7th, 2011

As they inch along Sydney’s congested roads during their weekday journey into the CBD, commuters have plenty of time to ponder their surroundings. What they see along the roads that snake towards the city centre are rows of shops, mainly constructed between 1890 and 1920. In Melbourne the “strip” shops are even more prolific, although the traffic may move a fraction faster.

These strip shops typically consist of two stories. The ground floor is a retail establishment – restaurant, dry cleaner, pharmacy, news agent and the like. The upper floor is more problematic: small legal and accounting practices, tailors, tattoo artists and, rarely these days, the living quarters of the retailer who operates the business on the ground floor. But many of these upper floors are simply empty.

Technology has changed, modes of transport have changed and lifestyles have changed. Many of the businesses that used to operate from these buildings have simply vanished. Technology, demography and rising household wealth have made a whole swathe of commercial real estate obsolete.

Obsolescence is talked about a lot but analysed seldom. And it’s big enough to matter. In the Sydney CBD over the past 20 years for every one hundred square meters of office space added to the market, forty-six square meters has been withdrawn. In the Australian residential market we measure very precisely the new dwellings constructed. In the year to June 2011 it was 155,730. But we have only the vaguest idea of the number of dwellings (probably around 35,000) that were knocked.

What drives obsolescence and demolition? It’s certainly a range of factors, some of which may be contradictory. If office rents are low, and expected to remain so, the incentive is to withdraw office stock for conversion – to hotels or residential uses, for example. Conversely, high or rising office rents provide an incentive to withdraw old buildings to be replaced by larger, newer buildings.

Overlaying these forces are extraneous drivers such as new technology, which encourages open plan office working and hastens the demise of older office buildings. The drive for security and environmentally sustainable buildings is also likely to reduce the economically useful lives of existing office buildings. Conversely, today’s low interest rates should, at least in theory, extend the life of existing buildings and lead to the construction of buildings with longer pay-back periods.

Obsolescence lacks the sex appeal of new construction and attracts much less attention from researchers and government statisticians. But over the next few years, as a spin-off from the Global Financial Crisis, new construction is likely to be low in many markets. So the economic impact of withdrawals, for demolition, refurbishment or conversion, is potentially significant. As Sydney’s strip shops show, whole categories of real estate can fall into disuse: wanted; a handy algorithm to predict the obsolescence and demolition cycle.

About the author
David Rees is the Head of Research for Jones Lang LaSalle in Australasia, based in Australia.

Posted in Australia, Construction | No Comments »

The Nanjing Retail Market Is Developing Smoothly

Tuesday, December 6th, 2011

Some observations from a recent trip to Nanjing revealed that the retail market is developing smoothly and there is currently no sign of oversupply. Compared to many Tier II cities, Nanjing is considered an advanced retail market. The following is an excerpt from the upcoming Nanjing retail report in the China Real Estate Intelligence Service (REIS).

  • - There is currently no sign of oversupply in the market.
  • - Commitment rates of upcoming projects for 2012 have already reached 60-75%.
  • - Once the anchors and sub-anchors are signed in new projects, little difficulty has been experienced finding inline tenants for the rest of the scheme.
  • - Among new projects, few are of the tall mega-Mall variety, instead we saw more of the medium sized format with 3 or 4 stories of retail, rather than 6 – 10 stories, limiting the potential for rapid drop off in foot traffic associated with taller projects.
  • - More malls have also begun to differentiate themselves by breaking away from the basic “box” style and incorporating distinctive design features and better F&B offerings.
  • - New decentralised precincts are also emerging in areas that, to date, have been underserved by retail.

New malls in Nanjing seem to be putting a priority on getting the food and beverage component right. In fact, new malls are inclined to lease more space to F&B tenants and entertainment due to the ready demand for food and beverage by the surrounding residents and workers. Some projects have taken their F&B focus a bit further and aim specifically at new entrants to the Nanjing market in order for their property to stand out. Fashion has been a bit more challenging to get “right” in terms of the right brands. For example, one recently opened mall in central Nanjing is nearly devoid of foot traffic except for the food and beverage section in the basement. In addition, malls are trying to differentiate themselves by use of a theme. The first to do this was Aqua City in 2008, with a water theme, and the latest is an upcoming shopping mall called the Forest Mall, which will have rooftop gardens, reflecting pools, and alfresco dining. An upcoming Hexi mall was rumored to be in the shape of a ship.

The newest luxury malls in Nanjing are still in the early phase of what we think of as the “retail lifecycle.” They are quiet but this is relatively normal. The luxury market is still dominated by a few department stores which enjoy destination status throughout the region. Many of the traditional department store customers are just beginning to discover the alternatives. In that sense the era of the department store is far from over. Downtown department stores are still trying to outdo one another, most recently by updating their exterior façades. As for shopping malls, upcoming developments understand that there is strong potential for mid-market retail, and they do not need to cling to a luxury positioning strategy.

For more details on the Nanjing Retail property market or any of the other 19 large cities in China that we cover, consider becoming a subscriber to our China REIS data service.

About the author
Steven McCord is an Associate Director in Jones Lang LaSalle’s research team in China, based in Shanghai.

Posted in China, Commercial Property, Retail Research | No Comments »

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