Archive for July, 2012

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Kowloon East – A Resilient Strata-title Office Sales Market

Tuesday, July 31st, 2012

The Grade A strata-title office market in Kowloon East has grown considerably in recent years. Since 2008, a total of 1.5 million sq ft of new strata-title Grade A offices have been built in the submarket. The growth in stock has been matched by the surge in office sales volumes, which grew from HKD 626 million in 2008 to HKD 1.88 billion in 1H12. Moreover, prices have steadily risen over this period.

So what is driving the growth of the market?

To answer this question, first and foremost, we need to know that there is a distinct lack of tradable stock in Hong Kong’s Grade A office market. By our estimates, about only 20% of the total stock is held in strata-titled ownership. This essentially has created a very limited market with few opportunities for investors and owner-occupiers. Hence new strata-titled properties placed onto the market are quickly snapped up. In Kowloon East, investor interest is further supported by the higher yields on offer, relatively lower lump sums involved and the long term growth potential of the areas stemming from the government’s CBD2 development framework. Recently completed strata-title Grade A office buildings in the submarket have typically achieved pre-sales rates of at least 80% upon completion.

Against this backdrop, we have seen prices steadily rise. According to the Land Registry, the average transacted unit price for strata-title buildings in the Kowloon East Grade A office market climbed 28% y-o-y to about HKD 7,000 per sq ft (gross) in 2Q12. Coupled with the continuing growth in sales volumes, this suggests that investors continue to see value and potential in this submarket.

Looking ahead, I do not believe that the strata-title sales market will become saturated as the supply pipeline for strata-title Grade A offices in Kowloon East will gradually narrow over the medium-term. High land premiums, soaring construction costs and the on-going emergence of Kowloon East as a preferred office location will lend support to prices. Notwithstanding any unforeseen economic calamities, I expect the Kowloon East Grade A office market to continue to reach new highs over the short term.

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

Posted in Hong Kong, Office Research | No Comments »

Housing Bubbles In Metro Manila

Monday, July 30th, 2012

Speculators have been wary of a housing bubble developing in Metro Manila for the past 10 years, particularly in the condominium market. These expectations should have caused the future supply to contract. However, instead of declining, annual project completions have continually increased. From 2012-2016, approximately 154,000 condominium units are expected to complete. This is some 1.7 times the housing stock completion from 2007 to 2011 (87,000 units) and almost 9 times that between 2002 and 2006 (17,500 units). Even prices have continually increased. Capital values for mid-end condominiums grew by an average of 13% annually between 2004 and 2001 while rents grew an average of 8% annually over the same period. The global economic downturn in 2008/2009 only led to a marginal decline in the rate of price increase.

Even though the supply growth accelerated, take-up levels have remained competitive. Developers are seeing healthy sales rates for their developments, which encourage them to build more projects.

Where is demand coming from? For years we have attributed the high take-up to remittances from Overseas Filipinos (OFs). While this is partly the cause, the offshoring and outsourcing industry (O&O) has also played an important role in this activity. The growing number of O&O firms has significantly expanded the mid-end market. As O&O firms established offices outside the traditionally preferred business districts such as Filinvest Corporate City, Madrigal Business Park, Araneta Cyberpark, and McKinley Hill, developers followed suit. Today there are 18 emerging urban districts in Metro Manila, in addition to the three traditional business districts, Makati Central Business District (CBD), Ortigas CBD and Bonifacio Global City. These districts offer a community comprising retail, office and residential projects, which are attractive to both occupiers and developers.

Extended family is the traditional household form in the Philippines, either because of closely-knit familial ties or for financial practicality. In the past, although there was a desire to purchase separate homes, these Filipino families did not have the financial capability to do so. However, with the continuous growth of the O&O industry, household income levels have risen and consequentially homeownership too. As most condominium buyers are mostly end-users, market prices have continued to grow moderately unlike some Asian cities where prices have been driven up more by speculative investors.

Currently, this ‘bubble’ is being ‘filled’ by genuine demand from end-users, and the market seems able to absorb the incoming supply over the short- to medium-term. Nevertheless, there is a large supply over the next five years, making market positioning and aggressive marketing campaigns crucial for developers if they wish to maintain healthy take-up rates.

About the author
Sharon Saclolo is a Research Manager for Jones Lang LaSalle in the Philippines, based in Manila.

Posted in Philippines, Residential Research | 1 Comment »

India Office Real Estate: Half Year Review

Friday, July 27th, 2012

Jones Lang LaSalle’s REIS findings are in, and a closer look at the 1H12 data reveals relatively subdued activity during the period compared to 1H11.

In 1H12, the top seven cities of India together recorded a 35% dip in absorption compared to 1H11. The contraction in demand caused developers to progress more slowly on their projects thereby aligning the supply with demand. Supply fell by 52% during the period. As a result, contrary to the trend of 1H11, on a national level, demand for office space in 1H12 exceeded the office space supplied. However, this trend varied from city to city. The growing supply of the office markets of Mumbai and NCR-Delhi continued to outpace absorption while the other Indian cities mirrored the pan-India trend of demand outstripping supply during 1H12.

Mumbai (with a 32% share) was the top contributor to the total absorption in the pan-India region during 1H11. However, in 1H12, Mumbai only recorded 19% of the absorption, coming in second place compared to NCR-Delhi, which was responsible for 21%, an increase from the 18% figure it recorded in 1H11. The primary reason for this activity was healthy pre-commitments among the new completions in NCR-Delhi that were better than those in Mumbai. On average, the share of net absorption from the new completions during 1H12 in Mumbai and NCR-Delhi has remained around 60%, as opposed to the national average of 29%.

Backed by relatively healthy leasing activity, Bangalore, Chennai and Pune together accounted for nearly 45% of the pan-India absorption in 1H12, an increase from the 42% recorded in 1H11. Hyderabad and Kolkata together increased their total absorption from 8% in 1H11 to 14% in 1H12, primarily due to the penetration of good quality office buildings with moderate occupancy rates over the past few quarters. While Bangalore, Chennai and Pune recorded a drop in their vacancy rates during 1H12 compared to the levels of 1H11, other Indian cities recorded marginal rises in their vacancy rates on the back of mounting supply pressure.

Supply overhang to persist amid moderate pre-commitment levels in near term supply

Only 23% of the annual supply forecast for 2012 is operational in the top seven cities of India as at end-June, showing the impact slowing demand has had on the construction progress of the supply expected in the near term. A greater share of the year’s supply is expected in 2H12 with moderate pre-commitments levels of less than 25% (as of 1H12), which will likely result in the national vacancy rates increasing from 16.9% to 20.3%, a rise of 340 basis points. This in turn is likely to restrict the extent to which rents and capital values can appreciate over the short term in select over-supplied sub-markets across India, keeping both marginally above their cyclical lows recorded during 2H10.

As a result, the strategic window of opportunity for office occupiers remains, as the country’s office market is likely to continue favouring tenants in the near term.

About the author
Hariharan Ganesan is the Senior Manager, Research for Jones Lang LaSalle in India, based in Mumbai.

Posted in India, Office Research | No Comments »

CRE Function Undergoing Major Transformation In China

Thursday, July 26th, 2012

The corporate real estate (CRE) function in China is undergoing a major transformation as illustrated in our latest Corporate Research report, The Dragon is Stirring – China Corporate Real Estate Survey 2012. One of the key findings is that global and Chinese companies’ outsourcing practices are converging in most areas. As perceived barriers to outsourcing (primarily concerns over employment levels and loss of control) are waning, a majority of Chinese companies will deliver CRE services via a mix of in-house and outsourcing three years from now. A fringe of listed and private companies is even considering fully outsourced delivery.

But the propensity to outsource is unevenly distributed depending on the type of CRE services. In line with the trends observed globally, property management is most likely to be fully outsourced today in China. More surprising was the level to which energy and sustainability services (ESS) is currently outsourced. Although an area often lacking a substantial level of in-house expertise, ESS is obviously already an important consideration for Chinese companies. Beside large stride progress on corporate responsibility issues and expected cost savings on energy, ESS plays a key role in attracting and retaining high calibre employees. Gaining ground in the acute war for talent that companies in Chinese major cities are experiencing involves demonstrating the sincerity of their corporate ethical values, and a green workplace is one of the ways to achieve that.

Figure 1: Which elements of your CRE function does your company outsource today?

Three years from now, a double digit percentage of Chinese companies is likely to outsource to a higher degree the delivery of a number of CRE functions. They are, in this order:

  • - Portfolio and facilities management
  • - Project management; design and build-out or fit-out; development services
  • - Transaction services
  • - Property management

Portfolio strategy and transaction services are more likely to remain undertaken in-house.

As our survey respondents indicated, the pressure of maintaining high-levels of growth coupled with heightened cost control are likely to be major drivers of increased outsourcing over the next few years. Intensified competition and amplified industry consolidation are also likely to force companies to place greater focus on their core business and to outsource non-core functions.

The survey findings are meaningful for service partners. While respondents have indicated a greater willingness to outsource, their preference goes for a hybrid, more fluid outsourcing model. This highlights the importance to invest time and effort in getting to know the unique needs and characteristics of Chinese companies’ portfolios. It also reveals a latent demand for greater flexibility in designing bespoke solutions.

Key takeaways for Chinese companies’ CRE executives are multiple. As they move along the outsourcing curve and adopt more mature positions, they might consider relationships that share goals, risks and rewards in order to achieve a true alignment of interests. They will benefit from being very clear on what they need from their service partner, both now and in the future, and in undertaking a thorough review of what the market can offer.

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

Posted in Asia Pacific, China, Corporate Real Estate, Facility Management | No Comments »

Resilience Of The Indian Economy – A Myth?

Wednesday, July 25th, 2012

Macro-economic stability is on every policymaker’s agenda. The pressing need for macro-economic stability in India stems from the fact that macroeconomic fundamentals seem to be somewhat floundering in the country. GDP growth was recorded at around 6.5% from 2011-2012 down from over 8% in 2010-2011. This has also had an impact on the Indian realty market. A closer look reveals that the stumbling growth can be largely attributed to a combination of poor global sentiment along with challenging macroeconomic factors such as high inflation and high interest rates on home loans, etc. However, if we dig deeper, we begin to question some basics at the grass-roots level – Are the current macro-economic fundamentals in the country a derivative of what conspires in countries elsewhere? Or, were these already faltering and simply got aggravated due to occurrences in the global economy? Is the Indian economy no longer decoupled? We need to understand that global capital flows form the nexus between the Indian realty market, the Indian economy and the global economy at large. However, India is one country that is largely perceived to be an insulated economy and what remains to be seen is the impact of the fact that India is not decoupled on foreign investors. Could this, perhaps, make them reluctant to invest beyond their own borders – preferring to deal with risks within their known markets? Or, can the falling rupee be expected to prompt NRI investment in the property market? Investors, at the end of the day, need to have a greater comfort level concerning the global economy and the global financial system in order to move forward with portfolio expansion.

Close on the heels of the dwindling economic growth, the realty market in India remained subdued during 1H12. There was a relative slowdown in absorption levels in the residential segment in 1H12 in comparison to 1H11 at a pan-India level and high inventory and slow execution of projects continue to be a cause of concern across asset classes (JLL REIS 2Q12). The Reserve Bank of India currently maintains a cautious stand on rates and the country is operating under a tight fiscal stance. It is interesting to note that we had three great years of GDP growth and hence the expectations were set very high. However, 5.5%-6.5% growth in GDP for India could be the new “normal” If there is macro-economic stability, lower inflation and no asset price bubble, interest rates will come down and housing will become more affordable. Also, gaining an understanding of the fact that an economy by itself is not a stand-alone conundrum, but rather a microcosm of a much larger picture would help better equip ourselves to deal with “black-swan” events that threaten markets elsewhere, but have the possibility of creating ripple effects throughout. The Indian economy was not decoupled in 2008 nor is it decoupled today. India is very much part of the global ecosystem and we are feeling the heat of occurrences elsewhere.

About the author
Ankita Satnaliwala is the Asstistant Manager, Research and Real Estate Intelligence Service for Jones Lang LaSalle in India, based out of Kolkata.

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

The G20 A Game Changer For Brisbane?

Tuesday, July 24th, 2012

Brisbane has been selected as the venue for the G20 summit to be held in November 2014. The announcement created controversy in Australia, with some feathers ruffled that Sydney and Melbourne were overlooked. The decision underlines a steady re-weighting of economic clout and population that is driving the resource-based states of Queensland and Western Australia into positions of greater profile globally.

The G20 summit will not be Brisbane’s first event of global significance. World Expo ’88 is credited with cementing Brisbane’s transition from a big country town into a major capital city that could align itself with Sydney and Melbourne. This event left Brisbane with Southbank; a world class park, recreation, dining, cultural and convention precinct. Southbank will again be centre stage at the G20 Summit in 2014 and hopefully will again leave a lasting impression on the 4,000 delegates and 3,000 media from 27 countries who will be visiting the city in 2014.

Offshore real estate investors moving funds into Australia show a strong preference for Sydney and Melbourne. Domestic institutional investors are also typically overweight these two markets. But these portfolio decisions are getting harder to justify. Historically the best Brisbane CBD assets have traded at around a 75 bp yield discount to Sydney and Melbourne – the question for investors is whether this spread will narrow going forward as Brisbane’s profile rises ?

The Brisbane CBD office market accounts for 13% of total Australian CBD office market stock by area, and around 14% by value. The city of Brisbane has had its ups and downs in recent years. Between June 2008 and December 2009, office prime gross effective rents declined 46% under the impact of the Global Financial Crisis and vacancy rose from 1.4% to 10.2%. In January 2011 the Brisbane CBD was closed for five days due to major flooding. However, Brisbane’s recovery from these adversities has been swift. In the office market, capital values have been rising since December 2010 and the vacancy rate, currently 8.8%, is forecast to decline to 5.6% in 2014. In June, Brisbane’s latest premium grade office tower, the 64,000 sqm 111 Eagle Street, reached practical completion around 85% leased. The newly elected State government of Queensland is currently reviewing plans for a series of major developments in the CBD over the next three years.

The G20 decision is a reminder to Sydney and Melbourne that the long term trends are running Queensland’s way. Over the last 25 years, Queensland’s share of Australia’s GDP has risen from 14.8% to 19.4%. Strong economic growth has brought with it strong population growth. Queensland economic growth has averaged 4.5% per annum over this period, compared to 2.8% growth in New South Wales and 3.2% in Victoria. Queensland’s share of the national population has also risen to over 20%.

Perhaps Queenslanders will be able to look back and say the G20 summit established Brisbane’s international profile just as World Expo ’88 assured Brisbane an equal place on the national stage?

About the author
Leigh Warner is a Director of Research for Jones Lang LaSalle, based in Brisbane, Australia.

Posted in Australia, Commercial Property, Economic Research, Resources Sector | No Comments »

Understand The Outlook For China’s Economy

Monday, July 23rd, 2012

Our baseline scenario for the outlook for China’s economy, since at least early Fall 2011, has been steadily slowing growth through the first half of 2012 – the so-called soft landing – followed by strengthening growth in the second half of 2012. We maintain this view, even in light of the 2Q GDP report last week, in which China reported year-on-year growth of 7.6%.

So what is it that gives us confidence that China’s economy will rebound later this year? There are two primary components to this outlook. First, a steady rebound in infrastructure spending since the beginning of the year, culminating in a huge jump in the June data, with a coinciding jump in bank lending. Second, steadily increasing residential transaction volumes since Chinese New Year, driven by first time home buyers. Together, these two components drive demand for large segments of the domestic economy – from heavy industry and manufacturing, to commodities imports, to employment.

The other important thing to keep in mind is that neither of these things has happened by accident. They are both the result of intentional government action. In particular, understanding what’s happening in the housing market, and the stealth easing that has been in process since at least February, is key to the sustainability of the volume recovery. Down payment requirements were brought back down to 30% in the first quarter, and we’re hearing about some small banks now offering 20% down payment home loans. The two interest rate cuts in the last month have helped with pricing as well, with mortgage interest rates having fallen from as high as 7.5% at the start of the year to potentially as low as 5.1% at big banks and, unofficially, 4.2% at small banks for first time home buyers.

With the large amount of residential supply in the pipeline in most cities, we are not expecting developers to achieve pricing power in 2012, and this limits the risk of policy backsliding toward renewed restrictions. The key, though, will be that policies limiting investment purchases remaining in place, and enforced. It is the enforcement part that has led to the constant rhetoric from the Central Government about remaining vigilant about prices. They need the local governments to maintain enforcement of HPRs, which have been effective at marginalising investor demand. This will be a greater and greater challenge as volumes and sentiment improve in the second half of 2012 and investors are keen to once again participate in the market.

So barring a collapse of external demand due to the Eurozone crisis or the US ‘fiscal cliff’, the rebound in infrastructure and housing markets in China will lead to stronger growth in the second half of 2012.

About the author
Michael Klibaner is the Head of Research for Jones Lang LaSalle in China, based in Shanghai.

Posted in China, Economic Research | No Comments »

Demand Falling For Singapore Residential Properties

Thursday, July 19th, 2012

The latest data from the Urban Redevelopment Authority shows that demand for new residential properties has fallen for the second consecutive month. Sales volume for private residential units, excluding executive condominiums, fell by 20% m-o-m in June 2012 to 1,371 units, bringing the total for 1H12 to 12,254 units. This is some 48% above the total sales in 1H11 and already approaching the 2011 total of 16,369 units following the bumper take-up between February and April 2012 when sales averaged in excess of 2,400 units per month.

The Outside Central Region (OCR) continues to perform well with total sales in June remaining above 1,000 units at 1,111, a decrease of 8% m-o-m. The number of units launched remained flat, with just three more units launched in June than in May, a total of 1,138. As a result, the take-up rate was close to 100% with 98% of all units launched being sold. There were three new non-landed projects launched in June, Tropika East (105 units), Sea Esta (376 units) and River Isles (442 units). These projects all achieved sales of more than 50% in the month, with Sea Esta showing the strongest performance with 68% of units sold. Elsewhere, buyers continue to soak up supply from previous launches, with several projects continuing to sell units without any launches this month.

The Core Central Region (CCR) was the only region to enjoy an increase in sales volume in June, as the launch of 1919 at Mount Sophia proved popular with buyers and 74 of the 75 units at the development were sold at a median price of SGD 2,042 per sq ft. Overall, 141 units were sold, an increase of 4% m-o-m, with the sales at 1919 making up 52% of this. Sales also remained steady at previously launched projects including The Trizon and EON Shenton which are now 88% and 85% sold, respectively. Launches however fell steeply in the CCR in June, down by 70% m-o-m to 94 units translating to a healthy take-up rate of 150%, helping to soak up some of the excess supply in this region.

The Rest of Central Region (RCR) saw steep falls in both the number of units launched and sold in June 2012, falling by 93% m-o-m to 71 units and 67% to 119 units respectively. This reflects the highest take-up rate of all three regions in June at 168%. There was only one new launch in the RCR in June, namely M66, where 70 units were launched, with the remaining addition a single unit at Ascentia Sky. Only 10 units were sold at M66, with previously launched projects proving more popular with buyers.

Previous policy intervention is now starting to work its way through the market and buyers are returning, especially to the CCR, as landlords become more flexible on pricing and the price gap between the CCR and OCR narrows generating more buying interest. Singaporeans are increasingly supporting sales volume in this region, helping to soak up the unsold inventory.

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

Posted in Residential Research, Singapore | No Comments »

Workplace Contributes To Employer Brand In Asia

Wednesday, July 18th, 2012

Asia is ready for workplace change. Work is changing and the adoption of new technology is progressing fast. With this, mindsets around mobile working are maturing, and organisations are increasingly responding. A compelling trigger for change is the talent attraction and retention challenge that is maintaining its top position on the Asian CEO agenda, as pointed out in our latest thought leadership piece, Driving Effective Workplace Change in Asia.

Particularly in the largest cities, high-caliber talent is:

2010-2030 talent shortages and employability challenge map

Multiple factors are aggravating the situation. Expanding companies (both domestic and international) are vying for the same highly skilled talent in Asia without which they cannot achieve their global ambitions. In some countries, including China, the talent pool is shrinking because of an ageing workforce. In others, in spite of large talent pools, higher education curricula do not align with employers’ needs, leading to an employability deficiency with a double-digit proportion of candidates not meeting multinational companies’ standards.

For companies to become talent magnets, they have to improve their employer brands, an area in which Western multinationals used to be better equipped. Today, competition has become tougher with a number of domestic companies also armed with very strong brands. Aligning the workplace with organisational brand is important to provide work environments that materialise the brand’s promises and reinforce the stickiness of talent to the firm. Illustrations of corporate real estate’s (CRE) contribution to improving brand equity include the creation of “branded environments” and the sprouting of a new generation of cutting-edge campuses for India’s services firms.

The ingredients for success in the talent marketplace include offering attractive working environments, spaces that enable collaboration and facilities that promote health and well-being. However, physical workplace factors aren’t enough and CRE must consider the workplace as an expanded realm. Other crucial factors for talent attraction and retention include supporting individual technology preferences, enabling flexible work programs, empowering people to perform, rewarding them appropriately and providing them with access to experts and mentors. To achieve this, CRE will need to join forces with other departments such as HR and IT.

One of CoreNet Global’s CRE 2020 bold statements predicts the emergence of a super-nucleus of functions. Talent is an area where effective cross-functional collaboration is within reach. An opportunity that CRE teams are starting to seize in Asia.

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

Posted in Asia Pacific, Corporate Real Estate, Employment, Workplaces | No Comments »

Looking For Risk Adjusted Returns In Brisbane’s Secondary Market

Tuesday, July 17th, 2012

Jones Lang LaSalle believes the value proposition for secondary grade assets in the Brisbane CBD has changed. Brisbane’s CBD office market has recovered strongly over the past two years and is into the early phases of an upswing with demand underpinned by the resources sector. Despite the strong underlying fundamentals of the Queensland economy, and the positive outlook for Brisbane’s CBD office market, the risk premium for secondary assets is at its widest point on record.

The premium that investors have historically required for moving up the risk curve to secondary grade assets in the Brisbane CBD is around 575 basis points above the real risk-free rate. The risk premium is now at an all-time high of 819 basis points and exceeds the level reached during the early-1990’s recession (664bp) and the GFC (660bp).

A large part of the current spread can be explained by the recent decline in Government bond yields which has occurred as a result of investors directing money into risk-free assets due to the uncertainty surrounding Europe’s sovereign debt crisis. The other part contributing to the historically high spread is the secondary equivalent yield. Despite the strong recovery to Brisbane’s CBD office market and secondary vacancy moving back towards an equilibrium range, secondary yields have remained above their long term average since 2009. At the end of Q2/2012, the yield range for secondary assets was between 8.25% and 9.50%, implying that the mid-point is still 16 basis points above the long term average.

Institutional and offshore investors continue to pursue the relative safety of core prime opportunities, which has partly resulted in modest yield compression at this end of the market. However, a subdued supply pipeline has meant that prime opportunities are limited. Investor risk aversion has meant that demand for secondary assets has been somewhat subdued. Despite the recent risk aversion, which is being driven by economic volatility in offshore markets, we believe that the long term outlook for the Queensland economy is very positive and the fundamentals for the Brisbane CBD office market are solid.

If global economic conditions deteriorate substantially, Queensland remains in a relatively strong position. The fiscal and monetary policy ammunition that is available in Australia relative to other developed nations will support national economic prospects. The now very large volume of resources investment, totaling $48.95 billion, including projects that are either under construction or committed, will also put a floor under local economic conditions.

Strong demand fundamentals led by the resources sector will continue to underpin the Brisbane CBD office market over the short to medium term. The completion of GPT’s 111 Eagle Street and Leighton Properties’ 145 Ann Street will see a lull in supply beyond 2012. Vacancy is expected to reach a cyclical low of 5.2% in 2014, which will support above trend rental growth. In light of this, we believe that risk adjusted returns appear very attractive for secondary assets.

About the author
Luke Prokuda is a Research Analyst for Jones Lang LaSalle, based in Brisbane, Australia.

Posted in Australia, Capital Markets, Commercial Property, Investment Research, Office Research | No Comments »

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