Archive for March, 2012

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Australia’s Property Market: Punching Above Its Weight

Friday, March 30th, 2012

I was down in my old stomping ground of Sydney last week and the city was at its spectacular best with glorious autumn days. The economic skies were mostly sunny, but with a few scattered clouds.

Australia was one of the few mature economies that managed to avoid a recession during the Global Financial Crisis. Strong commodity exports, particularly to China, helped shield Australia from a major downturn in the broader economy. Three years on and the resources sector is still buoyant, while other parts of the economy are slower. Banks are shedding jobs and, like their counterparts elsewhere, are offshoring some of these jobs to cheaper destinations such as India. Consumer spending is relatively subdued right now as households focus on reducing their debt levels. The high Aussie dollar – which has been above parity with the US dollar for most of the last year – is also causing some pain for the country’s manufacturing exporters.

Despite the more cautious economic mood, Australia’s economic fundamentals still look pretty healthy compared with many other countries in the West. Notably the unemployment rate at 5.2% is significantly below that of the US and Europe. Australia’s commercial property markets have been holding up well. Most markets have single digit vacancy rates with limited upcoming supply and in the office sector pre-commitment rates are high. That’s good news for landlords and investors with rents and capital values expected to see further increases this year.

The high Aussie dollar hasn’t deterred offshore property investors who accounted for a record 30% of total commercial transactions last year. For a small country with a population of only 23 million (equivalent to the population of Shanghai), Australia certainly punches above its weight in terms of real estate investment activity. Last year commercial investment volumes were the third highest in Asia Pacific, amounting to around two-thirds of the volumes in Japan and China, and remember these are the world’s second and third biggest economies. The factors that attract international investors to Australia are varied and numerous – including its economic drivers, attractive yields, relatively stable property cycles and high market liquidity.*

Australia’s highly transparent property market is also attractive to both domestic and international investors. In our last Global Transparency Survey in 2010, Australia was ranked number one in the world in terms of property market transparency. In quarter two we will be launching the 2012 results so we will soon find out whether Australia will maintain its crown. Stay tuned.

The Australian economy is expected to strengthen over the course of 2012 due to a pick-up in industrial production, retail sales and global growth…all boding well for the country’s property markets.

* For more details on the drivers of the Australian property market and 2012 outlook, please read a recent paper “Australia: What next for property?” prepared by my Australian research colleagues David Rees, Andrew Ballantyne and Karen Wales.

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

Posted in Asia Pacific Economy and Property Markets, Australia, Capital Markets | No Comments »

Setting Up For Future Growth

Thursday, March 29th, 2012

Flipping through Jones Lang LaSalle’s recently released China50 – Fifty Real Estate Markets that Matter, one gets the impression that the development of real estate markets in the Pearl River Delta (PRD) has plateaued. Since the last edition of the report (released in 2009), Dongguan and Zhuhai have made no significant progress along the City Evolution Curve. Foshan and Zhonghan have posted modest improvement but their pace of development has lagged behind other cities such as Changsha, Hefei, Zhengzhou and Jinan. Moreover, a number of cities, such as Chengdu, Chongqing, Shenyang and Tianjin have narrowed the gap between themselves and the PRD’s two Tier 1 benchmark cities, Guangzhou and Shenzhen.

Part of the reason why other cities in the China50 have performed more strongly over the last two years is largely due to the increased opportunities brought about by a faster rate of economic growth. Cities such as Chengdu and Chongqing, in China’s mid-west, are currently at the epicentre of economic activity as manufacturing moves away from the coastal areas and further inland.

So are the PRD property markets in danger of falling behind in the race to maturity? We think not. As highlighted in our white paper “China Pearl River Delta – Moving up the value chain” (released in 2010), the PRD is currently in the midst of a restructuring process that is transforming its economy from one that is highly reliant on low-end manufacturing to one that is made up of high-tech manufacturing and business services. This transformation is effectively laying down the foundations for the next wave of growth. Hence, while PRD cities appear to have made little progress along our City Evolution Curve in the latest edition of the China50, don’t be surprised to see these same cities being among the greatest improvers in the future.

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

Posted in China | No Comments »

Is The Indian Residential Market Headed For A Hard Landing?

Tuesday, March 27th, 2012

In 1959, Charles E Lindblom, the American political scientist wrote a paper titled The Science of “Muddling Through” in the Public Administration Review. In this he contrasted what he called the “root method” of decision making with the “branch approach”. The root method involves comprehensive evaluation of options in the light of defined objectives, whereas the branch method involves building up, step-by-step and by small degrees, from the current situation. Prof Lindblom claimed that “the root method was in fact not usable for complex policy questions”, and his verdict was that the practical individual must follow the branch approach – applying the science of muddling through.

The residential market in India, particularly in Tier I cities, has remained sluggish for the past 12 months. In these uncertain times, the question arises whether strategic decision making for residential developers to improve sales should follow the root method – a comprehensive evaluation of options, or the branch approach – a process of muddling through. In a multiple stakeholder environment with several large uncertainty input parameters, the branch approach seems to be the instrument of choice.

During good times, prices are invented. When the going gets tough, prices are discovered, hence the term, “Price Discovery”, with developers continually assessing the market with trial price levels to increase sales in on-going projects. To avoid adversely signalling the market, which could lead to a downward spiral, prices in on-going projects are sticky-upward. In the first phase, negotiations are held behind closed doors to test the market’s appetite, and, if sales do not recover, discounts are offered up-front on the table. If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. This is the stage when the market is said to have witnessed a correction. Since this goes through a process of muddling through, residential prices offered by developers in on-going projects rise like rockets but fall like feathers.

However, during a slowdown, developers try to register sales by launching new projects at much lower prices than the market average. Since new projects have a high construction risk, the lower price is somewhat justified and avoids the adverse signal to the market.

Is the Indian residential market headed for a hard landing? Despite slow sales, highly leveraged balance sheets, expensive finance in a high interest rate environment and rising input costs, developers have been able to avoid a market-wide crash. They have been able to generate sufficient cash flow through the gradual process of price discovery, and several factors such as expecting lowering of interest rates, approval to new projects, moderating inflation and hints of stability of global economies are predicted to tilt the market in their favour in the near term.

This leaves home buyers with a small window of opportunity – the next six months when home prices should witness marginal appreciation. After six months, a second wave of high appreciation is predicted. Are you geared for it?

About the author
Himadri Mayank is the Senior Manager, Research and Real Estate Intelligence Service for Jones Lang LaSalle in India.

Posted in India, Residential Research | No Comments »

Singapore Residential: More Measures?

Monday, March 26th, 2012

The URA monthly sales volume for private residential units (excluding executive condominiums) continued its rise in February, increasing another 29.0% m-o-m to 2,413 units! At this rate, we could be looking at over 25,000 units by end-2012. Is this possible? Probably not.

The strong showing is merely a post 8 December measure effect. Our study of previous measures has shown that the market typically rebounds within 60 days of a measure’s announcement, given the residual, but discretionary demand of about 900-1,000 units a month. As one would expect in any rational market, buyers typically delay making any major decision at least until the measure is somewhat better understood. Then residual buyers will usually return to the market in the second month after the measure comes into effect. In other words, one would expect demand to rise starting from the 31st day – (ok, I am just making my point, but in reality the market activity rebound is a more gradual process).

Taking a time-weighted approach, a total of 1,448 units was sold just 30 days before this latest round of stamp duty revisions was introduced on 8 December 2011, and subsequently volume dipped to 852 units in the following 30 days. With an assumed 900-1,000 unit latent demand each month, this means that there are about 48 to 148 units of unfulfilled demand waiting to return to the market. In the next 30 days, i.e. in February 2012, the transaction volume shot up to 1,926 units when, theoretically speaking, it should have been some 948 to 1,148 units. Why were there additional 700-900 units – equivalent to almost an additional month’s latent demand?

The 8 December measures effectively raised the bar to foreign entry to the residential market, and the resultant effect (intentionally or otherwise) was to encourage the return of local buyers. This demand was also helped by low financing costs, lack of alternative investment options, low total quantum cost coupled with developers’ continual support through absorption of stamp duty charges, furniture discounts and other incentives.

This strong market performance raises the risk of further measures but at this juncture it is unlikely we can expect any immediate government intervention. Overall property prices, as measured by the URA Property Price Index, increased by only 0.2% q-o-q in 4Q11, and secondary market activity also slowed. The bullish market performance is prevalent in the primary market only and, in my opinion, further measures are unlikely in the short term unless the volume of new sales continues to rise in March. Further measures, if any, would likely raise the effective interest rate on new housing loans and the property tax rate on investment in residential property.

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 »

In Disaster-prone Asia Pacific, Preparation Is Key

Friday, March 23rd, 2012

“The Wise Rabbit sat under a tree and pondered about life in general. ‘The world is full of difficulties and dangers. First, there are natural catastrophes such as earthquakes and landslides and storms. Second, there is always the danger of famine, of shortage of food and water. Third, there is the danger of thieves and robbers.’ He then remembered an important appointment and went away.” – Maung Htin Aung, Burmese folktales, 1948

APAC has endured extensive natural disasters historically, and those in recent years have devastated surrounding communities, severely impacted companies’ operations and negatively affected national GDPs.

Drawing on the collective experience of 200 Jones Lang LaSalle client sites affected in Christchurch, Brisbane, Queensland, Japan and Thailand in 2011, Surviving the Disaster Zone: Lessons Learned in Asia Pacific explores what has worked well in preparation for and during a crisis. The author, Rob Timmermans, highlights the best practice during each phase of an incident:

  • • Preparation. When a hazard warning is issued in advance, convene a crisis management team and consider what can be done to minimise the impact, for example taping up windows, sandbagging or ordering portable generators. Involve service providers early to ensure critical resources are on standby when needed.
  • • Event. During the down time when all preparations have been made and yet people are not able to commence recovery efforts, focus should be on people’s safety and managing the physical and psychological impacts on staff. Appoint a single point of contact for staff and provide timely updates using all available communications channels (including social media).
  • • Recovery. In the aftermath of the event, the priority is to ensure facilities are safe and/or to identify short-term alternative space. Nominate the corporate real estate team as the ‘authority’ in declaring a facility safe to occupy following a disaster.

Beyond these tactical learnings, it is critical to have strong business continuity plans (BCPs) in place. Rob advises to:

  • • Incorporate standard management practices into the plans as employees will be far better equipped to make swift and relevant decisions if they are in line with their day-to-day responsibilities.
  • • Look beyond traditional stand-alone BCPs and integrate off-site options such as the ability for staff to effectively work from their homes using broadband technology, allowing many functions to be executed without interruption.
  • • Opt for geography-specific approaches for back-up sites. Natural disasters have an impact will beyond the immediate surroundings so it is important to consider inter-state or offshore location options for back-up operations.
  • • Schedule BCP trials when some key members of the crisis team are not available, as will most likely be the case when a crisis hits. This will demonstrate wether the support network is capable or flawed.
  • • Build pre-emptive BCP relationships between CRE teams and service partners or between landlords and tenants, to streamline negotiations and deployment of resources during time-critical periods.

Fortunately, unlike the not-so-wise rabbit in my introduction, firms across the region are now proactively reviewing BCPs, a task no longer seen as a mere box-ticking exercise.

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

Posted in Asia Pacific, Australia, Corporate Real Estate, Facility Management, Japan, New Zealand, Thailand | 1 Comment »

The Global Hunt For Yield

Thursday, March 22nd, 2012

In 2011, offshore investors purchased AUD 3.7 billion of Australian commercial real estate assets. This equated to 29.5% of total transactions (above AUD 5 million) and the largest percentage on record. Offshore capital flows into the Australian real estate sector are part of a larger theme. Foreign ownership of Australian government bonds has risen from around 25% to 75% over the past ten years. Foreign ownership of listed equity has risen from 32% at the end of 2007 to around 45% by the end of 2011, a fifteen year peak.

There is a perception that Australia is predominately a play on commodities and more broadly, exposure to the robust Asia-Pacific growth outlook. In fact, the Australian economy is highly diversified with a sector profile not dissimilar to the US economy. In the US, the four largest contributors to GDP in 2011 were: Finance, Manufacturing, Healthcare and Professional Services. In Australia, the four largest sectors were: Finance, Mining, Manufacturing and Construction. Suppose we adopt the traditional economic definition of the ‘concentration ratio’. This is defined as the market share of the largest four producers. In the US, the four largest sectors account for 55.3% of GDP. This figure is much higher than the 41.8% that applies in Australia’s four leading sectors.

Investors are engaged in a global hunt for yield. The nominal 10-year bond rate in Australia is 4.36%, compared with US Treasury yields of 2.38% (March 19th) and the dividend yield on corporate equities is significantly higher in Australia than the US, UK and Germany. In commercial property, the average prime-grade yield in Sydney and Melbourne is 6.88% and 7.13%. In contrast, the mature office markets of London (4.00%), New York (4.30%) and Frankfurt (4.80%) are recording much lower yields. The spread between these markets and Australia is the widest in more than a decade.

The first few months of 2012 have actually seen better news on the global economy. Indeed, the Chicago Board Options Exchange Market Volatility Index (VIX) – a widely quoted measure of risk aversion – has receded to a level last recorded in June-2007. Nevertheless, offshore interest in the low beta commercial property market of Australia remains strong. A number of global pension funds and sovereign wealth funds continue to seek assets where a high proportion of the return hurdle can be met through income rather than heroic capital growth projections.

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

Posted in Australia, Investment Research | No Comments »

What Really Is A Green Office Building In China?

Tuesday, March 20th, 2012

A key theme of the 12th Five Year Plan in China is environmental protection and energy use reduction. As green becomes a prominent trend in the real estate sector, many newly constructed office buildings here have jumped on the bandwagon and started advertising their green credentials. New construction certifications go a long way towards making a building green, by requiring advanced design features. However, it is the total resource consumption during the building’s lifetime that has the biggest environmental impact. The emphasis has thus far been on developing new buildings with green design features and certification in order to make them marketable. Some might even call this “green washing”. The next step is to ensure that those buildings operate consistently in an energy efficient way. These are the real green buildings.

Processes and management practices are equally, if not more important than green design features. Proper operation and management translate into lower energy consumption over the building’s lifetime. To use the analogy of an environmentally friendly car, one would not say that a car was “sustainable” because it was designed with fuel efficient tires or electricity-saving headlights. It would be called environmentally friendly if it was fuel efficient and could drive many miles to each gallon (or kilometres to each litre) The overall impact of this car would be the amount of fuel that it consumed during its lifetime, a function of how much it was driven.

In China today we are seeing a lot of “eco-bling”. The main focus for a building’s construction and management should be process driven rather than feature-driven. Rather than installing a complicated new design feature that may be operationally inefficient, existing technologies should be optimised to perform in the best possible way. To read more on this topic, our upcoming white paper on green office buildings in Shanghai will explore these issues in-depth.

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

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

Where Is My Dream “Edutainment” Centre?

Monday, March 19th, 2012

The recent reported kidnappings are really alarming and they are a hot discussion topic amongst parents. But, other than this, it is true that finding a dream school or a good education centre is still an important issue, together with the problem of finding a way to kill time when our children have classes on our precious Saturday holiday.

It is a fact that there are a lot of education and tutorial centres in Hong Kong, located mainly in commercial buildings. However, it is really hard for us to find an organised commercial centre providing one-stop services for both students and parents, and preferably providing centralised customer services to transfer children to and from different education centres within the same building while parents are enjoying a massage or a facial. It would be perfect if all these services could be provided in a semi-retail commercial building with supervised entry and security guards.

I understand that it’s a logical move for landlords to target tourists with high spending power. However, prime retail space in Hong Kong which is easier to target tourists is limited, accounting for less than a quarter of the total retail stock. And while tourist spending accounts for about one-third of total retail sales in Hong Kong, local spending accounts for the rest!

A closer look at private consumption figures which also give breakdowns of resident and tourist service expenditure in Hong Kong, indicates that the education sector is in fact growing fast, and at a Compound Annual Growth Rate (CAGR) of 8.4% over the last two decades, reached HKD 20.7 billion in 2010. Along with the spending growth, we saw increasing leasing deals of playgroup centres, kindergartens and tutorial centres in recent years; furthermore, the market also recorded universities’ schools of continuing study taking up bulk space in office buildings. Meanwhile, the recreation and entertainment market size is quite big too, with private spending amounting to HKD 74.0 billion.

Interestingly enough, while the market size of the education sector in dollar term has been expanding over the years, the actual number of service users has in general declined, implying that parents’ spending on education per child is on the rise.


Source: Census and Statistics Department

Well, maybe my dream of an “edutainment” centre is too much of a fantasy to fully satisfy commercial principles, but I’m sure that the market potential for such a place for local residents is there. In particular, personal services cannot be replaced by online shopping, with money spent on these services translate mostly to commercial floor space demand. Yet spending on products does not since many products can be sold online which do not require commercial space.

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

Posted in Hong Kong, Retail Research | No Comments »

Economic Reform At The Doorstep

Friday, March 16th, 2012

As the 2012 annual conference of China’s top decision-making bodies draws to a close, I come away convinced that the long overdue economic restructuring process has finally started in a meaningful way.

Indeed, it would be understandable if one is sceptical about China’s economic transformation efforts. After all, shifting the economy towards domestic consumption was already the intention of the previous Five-Year Plan (2006 to 2011). Disappointingly by the end of the plan period, household consumption as a proportion of GDP fell sharply, households were saving more than before and income distribution continued to favour the State and enterprises. China’s economic planners were further from their goal than before. Even if their conviction is not called into question, there remain onerous challenges to surmount in order to successfully transform China’s economic structure. Take the income disparity issue as an example and one can easily appreciate the immensity of the task. The problem cuts across many dimensions within the economy – rural and urban, coastal versus inland, labour force versus state and enterprises, state-owned monopolies versus small and medium enterprises.

Yet, the policy makers’ recent actions have given me renewed optimism that things are different this time. The lowering of growth target for the first time in five years suggests that the previous “growth at all cost” model is being moderated, at least for the central government. Despite fragilities in the export and manufacturing sectors, China pressed ahead with minimum wage increases. Against the resistance of strong interest groups, we are now in the midst of the most credible property cooling cycle ever, with the government demonstrating steely determination to see residential prices fall further. The extent of social housing development is unprecedented. Indeed, even China’s inaction – adopting tighter fiscal policy even as economic growth moderates – signals a significant departure from past practices. Viewed from whichever angle, the government is breaking new ground and clearly moving in the right direction.

Whether China will ultimately be successful in transforming its economy remains a question and topic for another day. But the journey has already begun. For investors who recognise the potential in China’s economic restructuring story, now is the time to align themselves with the investment theme while this economic reform remains in its early days.

About the author
Mark Ho is the Local Director for Jones Lang LaSalle in Beijing.

Posted in China, Economic Research | No Comments »

Are There Storm Clouds On The Horizon?

Thursday, March 15th, 2012

At a first glance, taking a look at the recent Asia Pacific GDP growth statistics you could be forgiven for thinking that there are storm clouds on the horizon. Across the board, since September last year all the major countries in AP have had their GDP forecasts revised downwards.

Looking at China, the market pundits are certainly flapping! The “engine of world growth,” announced just last week that they are lowering their growth target for 2012 – 7.5% versus the usual 8%! Also, the import numbers released certainly took commentators by surprise. China imports outstripped exports by a not unsubstantial US$31.5bn, the biggest trade deficit since 1998, not insignificant in an export led economy like China.

Should the alarm bells be ringing and should AP real estate investors be concerned?! Let’s ignore headline grabbing sound bites and cut to facts. The bottom line is AP aggregate GDP growth is actually set to increase over 2012. Regional growth in 2012 will improve on the back of increased growth rates in Japan and China. In China we expect to see fiscal and monetary policy stimulating the economy, whilst in Japan rebuilding activities post last years earthquake will help to improve the economic outlook.

For investors, the rest of 2012 is likely to bring good opportunities to acquire assets. The Japanese market in particular is certain to present interesting options. At the height of the GFC downturn, we initially expected to see a number of distressed Japanese assets getting pushed onto the market, but that just didn’t happen, banks were more lenient than expected and rolled over loan covenants to accommodate their borrowers. However, now that we’re seeing conditions improving, we do expect to see these banks starting to put more pressure on their borrowers to push these out to the market and these assets will present excellent opportunities for the cashed up international investors.

Asia Pacific is interesting for international investors because it offers a good balance of opportunities. For Core investors, transparent mature markets such as Australia and Singapore are available to tap into, whilst Hong Kong still remains attractive, all be it that year to date it’s been a very locally driven investment market. On the flipside, more interesting opportunistic high yielding plays are there for the taking in the fast growing but opaque markets of Indonesia and Vietnam.

To sum up, are there storm clouds on the horizon? Well, if you’re sitting in Asia Pacific, I suggest you pull up a deck chair and enjoy the weather. For those investors in a strong position, the opportunities and growth in 2012 will very much be there for the taking. If international real estate investors are to deliver the types of returns their unit holders are looking for, with snail pace economic growth in EMEA and a sluggish America, investors will need to look to Asia Pacific real estate to deliver their numbers and now’s a pretty good time to be doing so.

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

Posted in Asia Pacific, China, Economic Research, Hong Kong, Indonesia, Investment Research, Japan, Singapore, Vietnam | No Comments »

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