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A Look Back At 2012

Friday, December 21st, 2012

Another year has flown by…while the world economy has slowed further. Asia Pacific certainly hasn’t been immune from the global challenges, but it has held up relatively well this year all things considered. As I look back on the last twelve months, here are a few of the highlights:

2012 regional growth is expected to come in at around 4.8%, or almost three times higher than the rest of the world. While the region’s exporters have been hit by weak demand from the West, growth has been bolstered by stronger domestic sectors.

Once again, China has been the regional outperformer with expected GDP growth of close to 8%, and recent data suggest a bottoming out of the slowdown there.

The prize for “emerging star” goes to Indonesia, while South East Asia generally has proven to be quite resilient over the course of 2012.

Across the region’s property markets, we’ve seen a divergence between leasing and investment activity levels this year. Corporates have remained cautious about expansion plans while investors, mainly cash rich locals, have continued to seek out acquisition opportunities.

Top of the office market rankings in terms of rental and capital value growth have been Beijing and Jakarta – not surprising given the economic performance and demand-supply fundamentals of these markets.

These results are in keeping with our latest global real estate transparency findings published in mid-2012. The biggest improvers in Asia Pacific over the last two years have been the South East Asian countries, led by Indonesia. China also recorded good progress.

The AP research team trusts that you’ve found our research to be of value in your decision making and we hope that you’ve enjoyed our blog series this year. We’re taking a short break from blogging and will be back in the new year.

On behalf of the team, I would like to wish our readers a happy festive season and all the best for 2013.

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

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

The End of Outsourcing?

Wednesday, November 28th, 2012

The past few months have seen the debate over “the end of outsourcing as we know it” fueled by KPMG Institutes’ The Death of Outsourcing and HfS’ The Death of the “O” Word blog posts. Far from signaling the end of outsourcing, they tend to describe the emergence of a new kind of partnership.

Analysing “how outsourcing is dramatically changing to bring more value and build stronger relationships between buyers and service providers” in their Obsolescence of Outsourcing series (Part 1: Out with the Old. In With the New , Part 2: Getting to Innovation), KPMG observes that companies are now “expecting a more comprehensive level of value out of their outsourcing relationships and expecting vendors to behave more like partners with a certain amount of shared priorities”. Implications include:

outsourcing shifting from a pure cost savings exercise to a “more of a value play today than ever before”;

outsourcing decisions being made at a level in the organisation more closely connected to the business strategy (If services providers “are not adding to the strategy, then they will detract from it”);

innovation being given a new chance to flow from service providers when “third-party relationships [are] better governed and integrated with the business”; and

using outsourcing as a means to gain competitive advantage.

Traditional transaction-based outsourcing deals are giving way to new forms of partnerships where the economics are in the results, not in the transactions themselves. In Vested: How P&G, McDonald’s, and Microsoft are Redefining Winning in Business Relationships, Kate Vitasek describes how under the Vested Outsourcing model each party has a vested interest in mutually-defining and desired outcome. Being invested in the success of each other’s overall business with a “what’s in it for we” mentality will strengthen the sense of partnership and encourage a more lasting relationship. This longer term approach incentivises partners for helping their client achieve a specific strategic result within a constantly changing environment.

In Build, Borrow, or Buy: Solving the Growth Dilemma, Professors Laurence Capron (INSEAD) and Will Mitchell (Duke University’s Fuqua School of Business) argue that sustainable growth strategies should not emphasise just one way of securing needed resources (know-how, technology, processes, people). This might result in falling into an “implementation trap” and losing out to competitors with more inclusive approaches. Instead, companies should select different growth modes and balance internal development (‘build’), contracting and partnering (‘borrow’), and mergers and acquisitions (‘buy’). The study found that while most companies use only one or two of these pathways, firms using multiple modes to obtain new resources are more likely to survive over a five-year period.

Clearly, outsourcing is transforming and might even shed its name, but partnerships are here to stay.

About the author
Anne Thoraval is a Director, in charge of Corporate Research Asia Pacific.

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

Asia Pacific Accounts For A Bigger Share Of Global Net Absorption Of Office Space

Tuesday, November 20th, 2012

The Asia Pacific Prime office market has accounted for a bigger share of global net absorption in recent years. Prior to the onset of the GFC in 2007, the region accounted for just one-fifth of the combined total net absorption of AP, Europe and US, as compared with a 50% share by the US alone. Since then, the US and Europe have seen significantly slower activity levels. On the other hand, net absorption in AP has quickly rebounded since the GFC to a record level in 2011. As a result, AP accounted for an average of 50% of global net absorption last year and is still expected to account for a similar proportion this year (see Chart 1).

Chart 1: Global Net Absorption of Office Space

Source: Jones Lang LaSalle, 3Q12

Net absorption levels in Asia Pacific are being supported by demand from an increasing number of MNCs coupled with maturing domestic firms, which require a large amount of Prime office space. It is also the result of large supply additions arising to meet this strong demand. Many markets, which either lacked quality space until recently (e.g. China and India) or had outdated office stock (e.g. Singapore), have undergone or are currently undergoing a major construction cycle. Between 2004-07, AP accounted for less than one-third of global completions but its share is expected to grow to over 50% this year, as construction activity in Europe and the US moderates due to weak occupier interest (see Chart 2).

Chart 2: Global Completions of Office Space

Source: Jones Lang LaSalle, 3Q12

Cautious corporates coupled with an uncertain global economic climate is likely to see 2013 net absorption in AP similar to this year’s level but below the record level in 2011. Demand is expected to remain subdued in the major financial centres, while remaining relatively stable in China, India and emerging South East Asia, but slightly stronger in North Asia. On the other hand, demand in the US and Europe is likely to remain below the long-term trend until there is a clear sign of an economic recovery. As a result, AP is still expected to lead global net absorption and completions. Given AP’s continuing economic outperformance, the region’s Prime office markets (core and emerging) should continue to move up the global league in terms of size and importance, thus opening up more opportunities for occupiers of space.

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

Posted in Asia Pacific, Forecasting | No Comments »

The Marginal Benefits Of Diversification In Australia’s CBD Office Markets

Thursday, October 4th, 2012

Diversification is the cornerstone of finance theory and practice. The benefit of diversification is that it helps reduce the risk of a portfolio of investments without necessarily reducing returns. The key factor determining the extent of this benefit is the correlation between the returns on the assets in the portfolio. One of the most important concepts of diversification is that assets need to be selected based on how they co-move with all other assets in the portfolio. Harry Markowitz (1959) explained this by stating, “to reduce risk it is necessary to avoid a portfolio whose securities are all highly correlated with each other. One hundred securities whose returns rise and fall in near unison afford little more protection than the uncertain return of a single security”. By taking the co-movements of assets into consideration it is possible to construct a portfolio that has the same expected return and less risk than a portfolio constructed by ignoring the interactions between assets.

Applying these basic principles to Australia’s CBD office markets provides some insightful conclusions. Table 1 shows the correlation coefficients of investment returns between Australia’s CBD office markets over the period 1984 – 2012. A coefficient of +1 indicates a perfect positive correlation, while a coefficient of -1 indicates a perfect negative correlation. The trick in portfolio construction is to simply combine assets whose return patterns are less than perfectly correlated for a given level of return.

Table 1 demonstrates that correlations between most Australian CBD office markets have been very high over the past thirty years. Sydney and Melbourne’s CBD office markets are almost perfectly correlated (0.9) as are Brisbane and Perth (0.9). The lowest correlations occur between Canberra and every other market (0.4 – 0.7), largely due to the large number of Government tenants and their resilience to the economic and financial drivers that typically influence other office markets. It is therefore suggested that with such high correlations only marginal diversification benefits can be obtained by spreading a portfolio of assets across various CBD markets.

Markowitz’s theory on portfolio optimisation seeks to assess the benefits of diversifying across assets with low or negatively correlated returns. Asset allocation decisions become less about determining the risk and return expectations at an asset specific level. As stated by Markowitz (1959), “a good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.” However, if high correlations exist between markets, investors in Australian office markets should focus less on portfolio decisions between markets and set out to choose a long list of good assets that meet the return target of the investor.

Table 1: Correlation matrix of Australian CBD office market returns 1984 – 2012

Source: IPD, Jones Lang LaSalle Research

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

Posted in Asia Pacific, Australia, Capital Markets, Investment Research | No Comments »

Excuse Me, Can I Talk About Yields?

Wednesday, October 3rd, 2012

If I got a pound, a dollar or even a dong for every time I’m asked about yields, I would indeed not be sitting in an office in Hong Kong, I’d be retired and lying back on a boat in the Caribbean slurping rum!

Investors regularly compare potential deals against aggregate metrics, however it’s important to truly understand what you’re comparing.

This subject is a minefield and indeed I can’t even attempt to be comprehensive here, but I’ll try and cover the three main measures.

The first and simplest aggregate yield to use for benchmarking an actual transaction or deal against is Market Yield. This is a simple yield calculated by taking net effective market rent and dividing it by market capital values. This measure assumes full occupancy and does not take into account any costs associated with the transaction itself or leasing. So, if I’m looking to buy a house today and rent it out, this is an absolutely perfect metric to benchmark the yield of my house versus the market average. Similarly, if I was looking at a newly completed office tower or a development asset, this would also be a good number to look at.

Most international real estate investors are not looking to buy just one house with one tenant, nor indeed in most cases are they looking to buy a brand new asset. In reality, if an investor is looking at a deal to buy a stabilised asset such as an office tower, then the tenants are likely to have signed leases at different times based on the prevailing market rent at that time. So, this makes the situation generally somewhat more complex.

In this case, with a stabilised asset, one needs to compare the deal to an aggregate yield measure which would attempt to take account of the rent roll in the market. In an ideal world, one should compare the deal number with the prevailing Cap Rate for the market. A market Cap Rate is essentially the average yield of recent comparable transactions in the market, but you’re only liable to be able to get access to a market Cap Rate in the most highly transparent and liquid real estate investment markets in the world, like Australia.

For this reason, in markets such Asia, where there are a relatively small number of deals, then proper Cap Rates are just not available, because there’s just not sufficient transactional data to calculate them. So what is the best aggregate measure to look at in this case? The answer is Effective Passing Yield.

Effective Passing Yield is similar to Market Yield in that it assumes full occupancy and excludes transactions costs, but what it attempts to do is to simulate the rent roll in the market. Essentially, it’s calculated by taking the average of the market rent over the average lease term in the market, and then dividing this by the current capital value of the market. By using this number, you’re able to compare your deal with the market in a more comparable fashion, because the number you’re comparing it with factors in a rent roll.

Of course any specific deal or asset will have attributes that affect the yield of that specific deal – quality, location, fit-out, tenants. That said in general, one of the three yield measures above should provide a sound basis for comparison.

Jones Lang LaSalle’s Real Estate Intelligence Service (REIS) provides a number of yield metrics to clients. I hope this simplistic look at yields serves some purpose and if you want more information, by all means pick up the phone if you’re willing to contribute a dong towards my retirement fund!

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

Posted in Acquisition, Asia Pacific, Capital Markets, Economic Research, Investment Research, Real Estate Research, Rental | No Comments »

The Rising Stars Of The Catwalk

Monday, October 1st, 2012

Asia Pacific’s retail sector makes for fascinating research. The sector is seeing a major transformation which reflects not only the rapid rates of economic growth in many markets but also the impact of common driving forces such as technological advances.

Our region has the full range of retail offerings from sophisticated malls through to mom and pop stalls. Physically advanced markets like Australia and Hong Kong are regional leaders in terms of the quality of retail stock as well as property management standards. In other markets, the physical retail landscape is changing dramatically alongside rapid increases in urbanisation and rising wealth levels. Take China – between 2011 and 2015, the middle class is expected to grow by almost 100 million people and we forecast that a whopping 400 new shopping malls will be completed across the 20 major cities in the country! In both China and other emerging markets, the continued evolution of the retail sector is bound to see improving quality of new retail developments, in turn driving further opportunities for both retailers and investors.

Already, increasing wealth levels are seeing international retailers set up shop (or many shops!) in rapidly growing markets. Shoppers are also hopping on planes to fly to markets that offer sought after goods at attractive prices. Hong Kong has to be the one of the best examples of this – in 2011, 28 million Mainland Chinese tourists visited the city and each person staying overnight spent an average of US$750 in shops, much of this spend on luxury items.

Asia Pacific’s retail sector is undergoing huge change not only in terms of bricks and mortar, but also due to the rapid growth of online retailing. This phenomenon is making an impact across all markets, both mature and emerging. In Australia, the government statistics bureau recently announced that it would start tracking the country’s online retail sales which have accelerated in recent years. Over in China, and while the physical retail sector is still developing there, its people have embraced internet shopping to the extent that China now tops the global ladder in terms of the number of online shoppers.

To read more about the latest trends in the region’s retail sector, please take a look at our new retail publication Retail Cities in Asia Pacific: The rising stars of the catwalk.

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

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

Occupiers’ Great ‘Wait And See’

Tuesday, September 25th, 2012

A record number of participants attended our latest Timing is Everything webinar last week, during which Jones Lang LaSalle’s three regional CEOs shared their views on where the global property market is headed. Overall, a strong sense of medium-term optimism is palpable from companies operating in APAC in spite of expected economic difficulties (Figure 1).

Figure 1 – Which of the two scenarios do you think is more likely to be the outcome in two and ten years’ time in APAC? (Occupiers’ responses only)

Source: Timing is Everything poll question, September 2012

Christian Ulbrich, CEO for EMEA, commented on the increasing dominance of emerging markets on the global scene, with European companies very focused on APAC exports. In sectors such as luxury, the APAC market has already overtaken the US market. As European companies are balancing growth between the regions, the rapid development of interactions between Europe and APAC bodes well for our region where retail space continues to show the strongest demand.

For Peter Roberts, CEO for Americas, APAC is also a big source of opportunity for US companies. He sees them more inclined toward transparent markets, where they are more comfortable; where the market is less transparent, they tend to opt for joint ventures (read here which Asian countries are moving up our Global Transparency Index). India is still in demand from companies looking to reduce costs of production and supply chain but a broader range of locations, such as the Philippines and Malaysia, are also considered. Another trend highlighted by Peter Roberts and confirmed by our poll question (Figure 2) is the significantly greater emphasis placed on sustainability criteria.

Figure 2 – Is your company looking to increase its focus on sustainability/ green initiatives as it relates to your occupation in APAC? (Occupiers’ responses only)

Source: Timing is Everything poll question, September 2012

Real estate growth in APAC is on various trajectories, as described by Alastair Hughes, our CEO for APAC. The region offers a mixed picture with high growth in cities such as Jakarta; slowing growth in China and India; moderate but rising growth in Japan and Thailand; a downturn in Hong Kong and Singapore on the back of weakening financial services demand.

Cautious with their expansion plans, corporations are increasingly reluctant to pay high rents in an office market that tends to favour landlords. As a result, they are adopting a ‘wait and see’ posture. This translates into a quieter office market and moderate leasing volumes compared to last year.

In terms of Corporate Real Estate (CRE) service delivery, there is no sign that the outsourcing trend is about to abate in APAC, a trend driven by two strong factors. Firstly, multinationals are set to use real estate (offices as well as industrial premises) as efficiently as possible, and CRE is now perceived as part of the solution. Secondly, outsourcing is gaining interest from domestic companies in Japan, China, India and Australia, in particular when they are expanding at home and abroad.

About the author
Anne Thoraval is a Director, in charge of Corporate Research Asia Pacific.

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

Multitude of events to determine course for 2013

Thursday, September 6th, 2012

As autumn rolls around we face another set of do or die events for the world economy. Four years after the start of the financial crisis political and electoral events are now seen as key to kick starting the global economy as the policy toolkit looks increasingly threadbare. While property may not be at the forefront of the discussions it will be impacted directly and indirectly from the events which unfold between now and the end of the year.

The number of key dates over the next four months are too numerous to mention but the key for commercial property is that the final quarter of the year is traditionally the busiest for investors. The danger of so many milestones is that there is always another one on the horizon to stall decision making. The final quarter of 2011 was the busiest since the financial crisis with almost US$120 billion transacted globally, with all three regions recording significant increases over their third quarter numbers.

The challenges for the global economy should not be underestimated, however the rewards are great. If the Eurozone moves down the path of greater political and economic reform and effectively becomes one country it will be the largest economy in the world. A smooth handover in China is fundamental to ensuring the economic gains made over the last 20 years are not frittered away by a small minority holding power. The United States is more complex; whoever wins power in November faces challenges that cannot be overcome in the short term, despite the political rhetoric. At least we are guaranteed a winner, a Greek scenario of election after election would see gridlock become the new normal. In the short term all eyes are on the German Constitutional Court, September 12th, and their ratification of the European Stability Mechanism (ESM), the same day as the Dutch go to the polls. These two events will set the tone for the period up to the end of the year and signal the path ahead for the Eurozone. A positive verdict from the court, and assistance for Spain and Italy would flow relatively quickly through the ESM and the European Central Bank. The Dutch elections are finely balanced with fringe parties attracting much of the attention and growth policies winning out over austerity, but whatever the result it is unlikely the Dutch would derail further European integration.

While it has taken four years, countless summits (Brussels hotels set to do well this quarter), trillions of dollars of stimulus and intervention the next four months could see the foundations established to resolve the current malaise. The multi-year deleveraging that is underway will continue as the scale of the problem for households and governments is too great to dismiss, however a series of positive events could well see the final quarter of 2012 continue the tradition of a frantic end to the year for commercial property investment markets.

About the author
David Green-Morgan is Global Capital Markets Research Director, based in Singapore.

Posted in Americas, Asia Pacific, Capital Markets, Economy and Real Estate Markets, EMEA, Global/Asia Pacific, Investment Research | No Comments »

Age drives office market rental growth

Tuesday, September 4th, 2012

“Demography is destiny” said 19th century French philosopher, Auguste Comte, and maybe he was right. Data from the 2011 Australian national census are emerging. They show that on census night, 9 August 2011, the Australian population numbered 21,507,717, an 8% increase since the count in 2006.

What else has changed over five years?

The proportion of Australians who live in capital cities grew faster than the total population; median age rose from 35 to 37 years; in 2011, 1.4 million Australians were in tertiary education institutions compared with 1.2 million in 2006.

So Australians are now more numerous, more urbanised, older and (arguably) smarter.

All these trends have implications for real estate markets.

Let’s focus on age:

Asia Pacific Then and Now, published in 2009 to celebrate the 20th anniversary of the Jones Lang LaSalle Real Estate Intelligence Service (REIS), profiled 17 major office markets across the Asia-Pacific region. Between 1989 and 2009, without exception, median age in all cities rose. Age and office rents are correlated. The markets with the highest rents in 2009 – Tokyo, Hong Kong, and Singapore – were also the markets with the highest median age: Tokyo (44.7 years), Hong Kong (41.9 years) and Singapore (40.6 years). The markets with the lowest 2009 rents (Jakarta and Kuala Lumpur) had median ages of 28.2 and 26.3 years respectively.

It is no surprise that larger markets (measured in square metres) tend to have higher rents. But, median age is statistically a slightly more powerful predictor of rental levels. With Hong Kong as an exception, the three markets that recorded the strongest rental growth (Beijing, Shanghai and Seoul) also recorded the biggest rise in median age (1989 -2009). In Singapore, for example, the median age of residents in 1989 was 29.3 years. Twenty years later the median age was 37.6 – a remarkable increase of more than eight years in twenty years.

Is this another spurious correlation? Maybe: but age does not work in a linear fashion. Assume everyone enters the work force at age 20 – admittedly a simplifying assumption. Then in 2009 the average Tokyo worker had been at work for 24 years while in Manila it was 3 years – that’s a vast difference in terms of experience, skill and productivity, which translates into wage levels, wealth and, especially, demand for white-collar services – banking, financial services and law.

Median age for Sydney and Melbourne is close to the regional average, and median age rose by a below-average 5.5 years between 1989 and 2009.

It’s probable that the ageing population has been one of the positive drivers of office markets across the Asia-Pacific region over the past two decades. And age profiles may give a clue to the future – cities with young populations may be candidates for strong future rental growth.

As the French philosopher observed:

“Death, too, may be considered a promoter of human progress. Youth is essentially progressive…if life were ten times as long progress would be greatly retarded.”

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

Posted in Asia Pacific, Australia, Office Research | No Comments »

How Does Office Demand Correlate With GDP Growth?

Friday, August 17th, 2012

Last year was a record in terms of take-up of Grade A office space across Asia Pacific. Given the more uncertain global economic environment over the last six months, it was not surprising that leasing levels slowed in the first half of this year. In aggregate, net take-up totaled 2.1 million sqm in 1H 2012, or about 30% less than the same period last year. However, 2Q saw somewhat of a bounce back, with levels only 10% below those of the same time last year.

The more subdued demand across the region is partly due to corporate caution coupled with slower economic growth. One can always build sophisticated statistical models to forecast property market trends, yet in this case, simple techniques such as correlation analysis can be useful in illustrating the important relationship between net take-up of office space and GDP growth. In aggregate, annual net take-up across regional office markets has been significantly and positively correlated with regional real GDP growth in the 2004-2011 period, or roughly over the duration of the last 1-2 office market cycles (see table below).

In particular, CBD take-up in the financial centres of Hong Kong and Singapore is highly correlated with both domestic and regional/world GDP growth, as these two small economies are highly exposed to the ebbs and flows in the global economy. CBD take-up in other regional centres such as Sydney, and to a less extent Tokyo, also seems significantly correlated with regional and world growth. This may be partly due to the activity of international occupiers (e.g. MNCs, financial services firms), whose real estate strategy and space requirements are sensitive to fluctuations in the external economic environment.

Of course, spacial demand in emerging markets such as China and India, stemming from both MNCs and domestic firms, also ultimately hinges on economic conditions. However, physical take-up in these emerging markets, which generally lacked quality space until quite recently, also highly corresponds with supply additions in the current and/or past year. This is especially the case for Beijing and some Indian cities, which have just undergone or are still undergoing a major construction cycle.

As most regional economies are expected to see slower growth (e.g. China, India, Singapore, Hong Kong), office leasing demand is expected to weaken moderately this year. In 2H, take-up of space is expected to slow in the major financial centres compared to the same time last year, remain largely stable in China and emerging South East Asia, but increase in India (due to more completions).

Correlation coefficients (2004-2011)

Source: Jones Lang LaSalle 2Q12, IHS Global Insight, July 2012
Note: calculations based on annual data from 2004-2011