Archive for January, 2012

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Industrial Revitalisation Has No Big Impact On The Grade A Market

Tuesday, January 31st, 2012

In its 2009-10 Policy Address the government announced an array of new policy measures aimed at optimizing the use of older industrial buildings in the city whilst also addressing the shortage of commercial space in core districts. Among these new policy measures, was the facility for owners to apply for nil waiver fee for change in use of older industrial buildings. As of end-2011, 15 applications had been approved with nine applications (total GFA of about 600,000 sq ft) targeting to office use.

For landlords of industrial buildings, the new measure has provided an opportunity to enhance their asset at relatively lower cost. Currently, the rental value of office-use premises can be 50-70% more than that of industrial-use premises with similar specifications in the same district. Office tenants can also benefit from the new measure because users in revitalised industrial buildings can occupy premises as offices legally and with less restrictions compared with industrial or industrial/office users. Moreover, the rental level of offices in revitalised industrial buildings is only around HKD 8-10 per sq ft, which is only 30% of Grade A office rents or 50% of Grade B office rents, in a similar location. As such, revitalised industrial buildings can be seen as a feasible option for more cost-conscious tenants who want to further reduce their operating expenses without trading off substantially on accommodation quality.

However, I do not see the wholesale conversion (change of use) of older industrial buildings creating much pressure on the Grade A office market. At least, we have yet to observe any notable movement of tenants from the Grade A office market into revitalised industrial buildings. Demand for offices in revitalised industrial buildings has so far been largely restricted to those relocating from industrial buildings nearby. So what is holding back more notable tenants from relocating into this seemingly more cost effective office space? Building specification is one of the major reasons. Although industrial buildings need to conform to an array of technical criteria such as fire safety and lift service systems before they can be subject to wholesale conversion, the revitalised buildings merely remain modernised industrial buildings and are not intended to be direct substitutes for Grade A offices. In reality, not all Grade A occupiers can accept such a down-grade in accommodation quality, as the difference in the quality of office space between industrial buildings and those that have undergone wholesale conversion is generally distinguishable.

In addition, in terms of future supply, there are currently only 50 cases pending approval. Compared with the estimated 1,200 industrial buildings that meet candidate criteria within the territory, the pipeline for revitalised industrial buildings is relatively thin. Most of these premises are small in scale with floor plate sizes typically less than 10,000 sq ft. These are not the typical sizes sought by traditional Grade A office tenants.

In short, while revitalised space may be an option for tenants seeking lower rents, it is not expected to have any significant impact on demand in the Grade A office market.

About the author
Frank Ma is the Manager of Research for Jones Lang LaSalle in Hong Kong.

Posted in Hong Kong, Industrial Research | No Comments »

What’s next for NZ retail?

Monday, January 30th, 2012

Retailer confidence surged over 2011 with all eyes on the Rugby World Cup 2011 to provide higher volumes and values of retail sales. While both datasets did not disappoint (up 2.1% and 2.2% respectively in 3Q11) with a boost of 80,000 visitors to New Zealand, it was the food, fuel and hospitality industries that benefited the most.

Now that our rugby visitors have left, earthquakes in the South Island’s Canterbury region have returned and the clouds over the Eurozone persist, confidence levels for the 2012 outlook have dipped slightly (albeit still more optimists than pessimists).

As we set out on a new year, the question quickly becomes: What’s next for New Zealand’s retail sector?

If we take a step back and look at the overall trends, optimism should be evident. Trend data from Statistics New Zealand shows a general uplift in consumer spending and a 2012 expansion is clearly possible – perhaps there may even be a surprise to the upside.

In addition to this, recent property metrics released in the 44th edition of New Zealand’s Real Estate Intelligence Service (REIS), which dates back to the late 1980s, shows that both Auckland and Wellington’s overall retail vacancy rates remain sub-5%.

So, if there is underlying support for a positive retail sector in 2012, why does it not feel like it when we are out on the streets?

Sometimes the most obvious answers stare us right in the face. New Zealand entered a skyrocketing growth phase before the GFC and a low phase during the recession. While the RWC2011 provided a one-off boost, it was never going to fuel the double-digit growth many became accustomed to pre-2008. Instead, the retail sector needs to reposition and refocus its strategies and build on the momentum experienced since 2008.

While Prime rents are expected to show further rental uplift over 2012, some landlords of lower quality space may find it difficult to raise rents and in some cases find suitable tenants. This will be especially noticeable in secondary locations with low foot traffic and sub-par shop fit-out.

Therefore, to fully embrace the optimism the retail sector holds and truly make the most of it, supply and delivery strategies will need to be a top priority for retailers to outperform rather than just meet monthly payments. However, landlords will also need to accustom themselves to a rapidly evolving retail environment if they haven’t already. Changing demographics, economics, technology, efficiencies, locational due diligence and a mandatory elevated shopping experience are factors that need to be explored intently.

Unavoidably there will be winners and losers in the retail sector over the next 12 months. However, if both retailers and landlords can focus on the positive, embrace the next challenge, the next set of industry changes and the next blip in pessimism, then they will be well-positioned for the next retail resurgence.

About the author
Chris Dibble is Associate Director of Research and Consulting for Jones Lang LaSalle in New Zealand.

Posted in New Zealand, Retail Research | No Comments »

Malls, Malls Everywhere Still Nowhere To Go!

Friday, January 27th, 2012

The last few months I kept noticing a lot of mid sized office and mixed use buildings in Mumbai going under the hammer. Not very surprising considering the wave of redeveloping real estate that has swept the city. What is so unusual about them then? Well, it is the proposed development- stand alone retail formats. The plots are just perfect, inside thick residential areas, abutting sub- arterial roads, and of a size to construct a hundred thousand square foot spread on three levels.

Not confined to Mumbai only, but almost all cities in India are witnessing the same. The reason? Substantial retail mall space getting built but only half of it is worth a glance from retailers! We are still stuck with the mistakes we made three or four years ago by jumping on the bandwagon and creating too many malls without reason. Few understood that building and running malls is a science and terms like catchment, location, supply bench marking, and mall management matter in a mall’s success.

So, we have quite a few mediocre shopping centres without the best of locations or catchments, designed experimentally and sold by strata. These are ruins of hastily commissioned projects where no retailers want to come thus piling up on vacant retail space. Adding to this problem, there are very few new launches that can lure retailers on project merit.

The retail industry in India is healthier than ever, rearing to scale new heights, confident of its markets spread in 53 cities housing more than a million people each. 2011 witnessed a supply of 13.8 million sq ft and 10.7 million sq ft of absorption (JLL Real Estate Intelligence Service, 4 Q 2011) that is 130% of that for the years 2009 & 2010 put together. Retailers are in the market again looking for space, willing to invest with long term business plans, offering a premium for even half-decent properties only to find all worthy properties consumed fully, good properties on hand being leased overnight and delaying decisions by a few days means dimming hopes of business expansion due to a totally external factor of lack of good space to sell their wares!

And just imagine what will happen when the FDI into multi-brand retail opens up!

With delays in completion and few retail conducive projects being launched, for retailers, it is malls, malls everywhere and still nowhere to go! So, enough is enough they say and start scouting for stand alone properties. With their eyes on old mansions, mixed use buildings, small office blocks in decent locations as well as emerging locations, big format retailers and giant chains are mandating property firms to broker deals for them. High streets were never out of form, now they come back with a vengeance. Properties which with retrofitting can enable you to start selling in no time are fast becoming precious assets of big retail companies. Even constructing glass cubes on plots that house “the building next door” is felt worthwhile rather than waiting for sensible malls to come as retailers do not want to remain static.

The stand alone stores are set to give shoppers a personalised experience and caring attention that many shoppers fear missing in malls; happy shopping!

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

Posted in India, Retail Research | No Comments »

Finance Sector Job Cuts Are Unlikely To Impact Office Markets

Thursday, January 26th, 2012

Rumours of headcount reductions in the Australian finance sector have quickly turned into formal job cut announcements following continued financial turbulence stemming from European sovereign debt issues. UBS reportedly predicts Australian banks are likely to shed 7,000 jobs over the next two years to offset the country’s weakest credit growth since World War Two. This would represent the largest downsize in the finance sector since the mid-90’s.

While these announcements grab the market’s attention and are a negative for sentiment, the headline figures, as well as the flow-on effects, are relatively benign. Let us assume that all job losses will be entirely limited to the major CBD office markets and apply a generous workspace ratio of 15 sqm per person. The total possible reduction in space occupation is only 105,000 sqm. This equates to a rise in vacancy of 0.65% across total CBD stock over two years. Pragmatically, this figure is likely to be much lower. Even if these losses are confined to Sydney and Melbourne CBD markets the impact on occupied space is only 1.1%.

Major banks are single tenants in a number of office buildings around Australia’s major finance centres. Anyone familiar with banks’ security measures would know that they are more likely to retain excess space and forego a small cost saving than they would be to compromise the integrity of their security by subleasing space to other tenants. Occupancy costs account for only around 10% of banks’ total operating costs, compared to nearly 60% for staff costs and 12% for IT. Therefore, any small occupancy cost saving would pale in significance to both the reduction in salary costs as well as the higher funding costs that banks are facing in 2012.Initial capital raisings from major banks show both nominal bond yields and spreads over swap rates have moved higher in January as bond investors seek higher returns in the non-government debt markets.

The banking sector faces a number of challenges in the year ahead; however, reported job losses are unlikely to significantly impact the domestic office markets. The poorer conditions in financial markets are likely to be short-lived. Continuing population growth, a forecast recovery in housing investment and a broad-based upturn in 2013/14 is likely to boost demand for credit. This in turn would have a positive impact on Finance & Insurance sector employment over the medium-term and could flow through to benefit Australia’s major financial centres.

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

Posted in Australia, Commercial Property, Employment, Finance, Office Research | No Comments »

Sedating The Residential Market

Wednesday, January 25th, 2012

The Singapore government closed the year with another tranquiliser for the residential property market. After a series of soft policy measures introduced as early as 2009, the government finished 2011 with its most punitive move so far – an additional buyers’ stamp duty (ABSD) to be paid by all buyers, including foreigners with, of course, varying degrees of incidence.

In my opinion, this policy has been introduced to provide a financial firewall around the property investment market. The idea would be that such a measure would discourage the flow of hot money into Singapore from Europe and the US, where further quantitative easing measures could be introduced should the Eurozone conditions worsen. This policy is particularly timely in light of Singapore slipping by one place after Hong Kong, US, and UK, in the Financial Development Report 2011, released by the World Economic Forum.

The initial impact of the ABSD on the demand for new residential units was felt equally in all sub-markets (prime and mass) on a month on month comparison. As a whole, new sales demand nationwide dropped by 63.0% in December to 632 units compared to 1702 units in November. New sales in the sub-markets i.e. Outside Central Region (OCR), where the mass market projects are largely located, and Rest of Central Region (RCR), also declined at 63.0%, the national average, while contrary to market expectations, Core Central Region (CCR), which contains prime market projects, declined a little less at 57.0% m-o-m. This lower rate than the national average can be attributed to the fact that activity in this sub-market was already weak before the latest policy was introduced. The impact on the high end market was therefore felt less.

However, taking away the seasonal factor, the CCR recorded the largest decline at 92.0% y-o-y, almost double the national average of 53.0% y-o-y. In contrast, OCR registered a better showing with a decline of only 19.0% y-o-y, suggesting that the depth and strength of this underlying Singaporean demand is likely to continue working its way through this market.

The initial effect of this new policy has been a 20-60% lowering of market demand for new homes. The first response to this policy is the most severe of all the policies I have seen since 2009, when the removal of the interest absorption scheme, and the interest loans only scheme, on 15 September 2009 caused market demand to fall by 25.0%. With the new policy in place, and coupled with the anticipated economic slowdown in Singapore in 2012, I expect demand to continue to moderate with an expected full year sales volume of 7,500-10,000 units, if the current pace of demand is sustained. Buying volume in the next 60 days, in my opinion, will remain in check with Singaporean buyers emerging across all submarkets after the Spring Festival to bargain hunt and provide support to market activity. Overall property prices island wide could see a potential softening of between 0-8.0% in 2012.

About the author
Dr. Chua Yang Liang is the Head of Research for Jones Lang LaSalle in South East Asia and Singapore.

Posted in Residential Research, Singapore | No Comments »

HCMC Offices: When Market Trends Aren’t Everything

Thursday, January 19th, 2012

With the current vacancy rate at 28.0% and the supply forecast to increase by as much as 33.0% in 2012, there is little wonder that many investors would declare Ho Chi Minh City (HCMC) Grade A office space as oversupplied. Indeed, HCMC dropped one spot to number four in terms of office property ‘Buy’ recommendations in the latest Emerging Trends in Real Estate Asia Pacific 2012 survey.

Nevertheless, the recent acquisition of Saigon Tower by Osaka-based developer Daibiru Corporation seems to be a heavyweight rebuttal to claims that this sector is no longer on foreign investors’ radar. So, what lies ahead? From a researcher’s perspective, and as researchers we are supposed to be unbiased, I would argue that while the overall outlook for this sector is one of uninspiring expectations, it is not to the extent to which investors can afford to ignore.

My key proposition is that market trends aren’t everything. And I believe this is even more true for an emerging market like Vietnam. By nature, studying market trends involves arriving at statistics intended to describe the overall market. While this is a must-have starting point, the use of market statistics alone may significantly oversimplify idiosyncratic characteristics in emerging markets, and consequently mislead investment strategies. There is already substantial academic literature suggesting that emerging market investment returns cannot be completely characterised by regular statistical measures. In technical terms, there is significant skewness and kurtosis. In simple terms, there are too many outliers in emerging markets. And outliers can be either good or bad.

Take the overall market vacancy rate of 28.0% for example. That seems very high indeed! However, three-quarters of the Grade A office properties we monitor in HCMC have healthy vacancy rates near or below 10.0%. The remaining quarter contains the majority of vacant space in the market. This is an example of how bad outliers can make market statistics misleading if they are used alone.

Having previously followed the Singapore office market, I have been surprised to encounter many cases in both HCMC and Hanoi where several office properties consistently enjoy strong rental performance while those of comparable grades struggle with rental declines. One may argue that in Vietnam a lack of information and immature market dynamics may result in certain tenants not being able to follow market norms. But I believe there are also other fundamental factors such as property management quality and developer profile that make certain properties outperform the rest. This is an example of good outliers being overshadowed by negative market trends.

Whilst overall market trends do impact on the investment prospects of every single office property, there will be certain individual properties that can buck the trend. In this light, I believe attractive risk-adjusted returns in HCMC offices are still available, albeit on a selective basis. We at Jones Lang LaSalle Research are committed to providing investors a fair, accurate and complete picture of both the trends and the outliers in the market.

About the author
Trung Thai is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Economic Research, Investment Research, Office Research, Vietnam | No Comments »

An Investment Strategy For Perth

Wednesday, January 18th, 2012

Perth is approximately 3,300 km from Sydney. For those of us based on the Eastern Seaboard of Australia – it can feel even further away. Indeed – at approximately 3,000 km – Perth is closer to Jakarta than Sydney.

The resource sector is the locomotive of growth in the Australian economy. As a result, Western Australia is now the heart-beat of the domestic economy. In an earlier blog – Perth: A Resource Boom, my colleague – Hugh Peacock – quantified the size of the upcoming resource projects – the numbers are impressive. Western Australia’s share of national output has already increased from 12.8% in 2001 to 15.1% in 2011. By 2021, the Western Australian economy is projected to account for 15.6% of Australia’s output.

The resource sector and those associated with the resource sector have been aggressive in their expansion plans. This is having a positive impact on the demand for office space. In 2010, the Perth CBD recorded 100,000 sqm of net absorption – the first time in Jones Lang LaSalle’s 40-year time series for the Perth market. 2010 was meant to be Perth’s annus mirabilis. However, the demand for office space gathered momentum and we recorded net absorption of 109,400 sqm in 2011.

Consequently, the vacancy rate in the Perth CBD was pushed down to 2.5% in 4Q11 and prime gross effective rents increased by an impressive 20.5% over 2011.

The strong growth in rents has flowed through to capital values. At the same time as Western Australia’s share of national output is rising, Perth’s share of CBD office market capital stock is increasing. In 1997, our bottom-up analysis showed that the total capital stock of Australian CBD office markets was AUD 38.4 billion. Perth’s share was 5.7%. In 2011, the total capital stock had increased to AUD 106.2 billion, but Perth’s share is now 11.6%.

Many real estate fund managers in Australia benchmark their performance against indices that reflect the relative size or value of the national markets. Whilst the Perth office market is growing in relative size, it is historically a volatile market due to its exposure to the mining and energy sectors. The volatility of returns in Perth is almost twice what was recorded in Sydney and Melbourne over the past 15 years. Volatility impacts Perth’s ranking on measures of risk-adjusted performance and makes the timing of the entry – and more importantly exit – strategy critical.

Previously, the Perth office market was too small a market to have a major impact on the overall performance of a fund. But with Perth’s share of CBD office total capital stock at 11.6% and forecast to rise over the next ten years, fund managers now require a clear investment strategy for their weighting to the Perth CBD office market. With the commodity boom likely to continue for at least the next few years, portfolio investors who ignore the Perth office market run the risk of under-performing. Fund managers no longer have the luxury of confining their activities to Australia’s Eastern Seaboard.

About the author
Andrew Ballantyne is a Director for Jones Lang LaSalle in Australia, based in Melbourne.

Posted in Australia, Investment Research, Office Research | No Comments »

Green Rating For Small Projects In India!

Tuesday, January 17th, 2012

The conceptual execution of green buildings in India is still considered to be in its emerging stages, while the Indian vernacular architecture focuses on construction of climate friendly houses. However, in recent times the popularity of green buildings in India has found more favour on account of the green rating that the buildings achieve. Most of the green buildings are marketed based on the rating they have achieved, be it IGBC LEED India or GRIHA – the two major rating systems in the country or international rating system LEED by USGBC. Interestingly, these rating systems are not only for large projects such as townships and industrial buildings but also for small projects such as residential buildings and other small size commercial buildings.

IGBC (Indian Green buildings Council) launched Green Home Rating System for residential projects which include individual homes, high rise residential apartments, gated communities, row houses and existing residential buildings which retrofit and redesign. GRIHA (Green Rating for Integrated Habitat Assessment) by TERI (The Energy Research Institute) launched SVAGRIHA (Small Versatile Affordable GRIHA) for projects with built up area less than 2500 sqm. SVAGRIHA includes design and evaluation of individual residences and small commercial buildings. Projects with small area have a cumulative effect on the environment as they the use a significant amount of energy and water. The rating system is expected to help these buildings to earn carbon credits based on their energy savings. This will add to the value of the building along with a reduction in operational costs. Therefore, these ratings are expected to generate more encouragement for the development of green buildings.

IGBC Green Home Rating System focuses on residential buildings. It evaluates on criteria such as sustainable sites, water and energy efficiency, indoor environment and innovation for certification. SVAGRIHA is an affordable rating system and a design and rating tool. SVAGRIHA will help a registered project with sustainable design solution where required and rate it accordingly. It evaluates on criteria such as passive architectural design, fenestration (the design and placement of windows in a building) design, artificial lighting, rainwater harvesting, innovation and usage of renewable energy.

The green foot print is increasing consistently in India. The increasing awareness about sustainability and increasing energy costs are driving the development of green buildings in India. From a mere 20,000 sq ft in 2003 it has increased to about 1 billion sq ft in 2011. This is expected to increase even further with the introduction of rating for small projects such as IGBC Green Home Rating System and SVAGRIHA. Small real estate projects form a very large part of real estate development in India and have a significant impact on the carrying capacity of land and its resources. If these small projects consistently and slowly start adopting sustainability principles in their design to get rated so that they can earn carbon credits, this will definitely have a significant, positive impact on the efficient usage of resources and reduce carbon foot print and in turn increase the green foot print.

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, Sustainability | 1 Comment »

Domestic Buyers Dominated The Shanghai Office Investment Market In 2011

Monday, January 16th, 2012

Domestic investors returned en-masse to the Shanghai office market in 2011, driving up both transaction volumes and prices. According to Jones Lang LaSalle’s preliminary figures, domestic investors spent more than RMB 20 billion on office assets in Shanghai in 2011, accounting for approximately 80% of investment volume in Shanghai office buildings for the year. Despite a tight lending environment, domestic investors were much more active in acquiring commercial properties in Shanghai in 2011 than in 2010. So what kinds of companies have been buying Grade A office properties?

SOHO China was by far the biggest domestic player in the Shanghai market. The Beijing-based developer’s expansion into Shanghai dates back to 2009 with the purchase of East Ocean Plaza, but has since accelerated rapidly. In 2011, SOHO China purchased two nearly-completed office buildings and a large number of development sites. Two of Shanghai’s most prime land sites under development along the Bund are now at least partially owned by SOHO China. Unlike many foreign investors, SOHO China tends to develop or purchase office buildings and then strata sell the space to both smaller investors and companies purchasing space for self-use.

The second major group of buyers was cash-rich companies which purchased space for self-use. China’s Tier II city office markets are dominated by this phenomenon, but the large number of purchases in Shanghai this year show there is still strong demand from domestic companies to buy high-quality office space in Shanghai as well. For example, two buildings in the Shanghai Port International Cruise Terminal, which overlooks the Huangpu River and the Lujiazui Financial District, were sold to end-users for between RMB 60,000 and 70,000 per sqm.

Demand remains strong from both domestic and foreign buyers, but prime supply is limited and prices are high. If the external economic environment deteriorates and developers experience cash flow pressure, it’s possible that more prime commercial buildings may enter the market as developers with limited access to financing may be forced to sell some prime assets to raise cash, leading to continued growth in transaction volume.

About the author
David Erickson is an Assistant Manager in Jones Lang LaSalle’s research team in China, based in Shanghai.

Posted in China, Investment Research, Office Research | No Comments »

Looking Back, Looking Forward

Thursday, January 12th, 2012

In 2011, the world was confronted with major economic and ecological events – from the US and Eurozone debt crises to the tsunami in Japan. While there were huge concerns about the negative impact these events could have on the Philippine real estate market, it in fact showed resiliency and maintained the 2010 growth momentum amidst these market externalities.

Looking across the office, residential and retail property sectors, these submarkets have shown improvements. In the office sector, almost 300,000 sqm of Grade A office space across Metro Manila was added to the existing stock. Sustained demand, primarily from the offshoring and outsourcing (O&O) sector, boosted office rentals while positive investor sentiment supported capital values. The residential sector recorded the highest number of annual completions at over 20,000 condominium units across Metro Manila catering to the middle- to high-end market. Demand for these residential units has been continuously supported by remittances from overseas Filipinos (OFs). This sustained inflow of OF remittances has also provided the spending power that drives the retail market which witnessed the entry of new local as well as international retailers, such as Emporio Armani, LeSportSac, Paris Hilton Bags, HTC and Jamba Juice, enhancing the demand for retail space throughout the year.

With 2011 under wraps, we now look to 2012 which is projected to be a banner year for the property market. Grade A office supply in Metro Manila is expected to increase by more than 550,000 sqm, almost double that in 2011. Two new green office buildings – Net Lima and Zuellig Building, expected to lead the trend towards more environmentally sustainable properties, are scheduled for completion this year. On the residential front, 2012 is likely to witness a completion of about 25,000 mid- to high-end condominium units across Metro Manila. This supply includes the completion of the internationally-branded Raffles Residences in Makati CBD, which has set record-breaking selling prices of PHP 200,000 per sqm (USD 4,520 per sqm). Meanwhile, the retail sector will probably see further expansion and renovation of shopping centres, increasing the retail space in Metro Manila, which is already home to three of the largest malls in the world.

In general, with the unprecedented increase in the amount of new supply expected in the various property sub-sectors, the market outlook for 2012 remains positive, although caution is still advised to property players amidst the uncertainties in the global scene. Optimism pervades the local atmosphere as 2012 is projected to be a remarkable year for the Philippine real estate market on the back of stable economic fundamentals, sustained growth of the O&O sector and OF remittances and improved investor sentiment.

About the author
Jessica Mae Go is a Senior Research Analyst for Jones Lang LaSalle in Philippines, based in Manila.

Posted in Philippines, Real Estate Research | No Comments »

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