Archive for the ‘Commercial Property’ Category

Back to the future as markets hit 2006 levels

Friday, January 30th, 2015

Its 30 years since Michael J Fox jumped in the DeLorean and started to travel back in time and eventually forward to the year 2015. So while we are still waiting for hover boards, flying cars and time machines we do have tablet computers, flat screen TV’s, and Skype. Unfortunately they didn’t cover the world of commercial real estate investment in any of the three films (an obvious oversight which probably cost them the Oscar) but it seems as though investment markets have picked up the plot anyway.

Commercial real estate investment volumes in 2014 have gone back in time to match those of 2006 at US$710 billion. But while the numbers look similar the makeup of the market is very different to 2006. While Marty McFly used biofuels to power the car in 2015, real estate markets are using a different type of fuel to power markets along. In 2006 debt and financial instruments were key to transactional volumes pushing above the US$700 billion mark; in 2015 it is equity that is the fuel of choice, with debt in an important supporting role.

Globally 2014 is 20% above 2013 levels with the Americas and EMEA growing by 25%; Asia Pacific was slightly more subdued with volumes increasing by 3%. For 2015 we see even more growth for investment volumes although more within the 5-10% range which means full year 2015 volumes of around US$740 – US$760 billion. If however, European QE has the effect on real estate markets that we witnessed in the US, Japan and the UK when they introduced similar programs then volumes could well move back to the future once again and pass the previous peak of US$758 billion which we recorded in 2007.

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

Two reasons why investment strategy for Singapore CBD offices has shifted

Wednesday, November 26th, 2014

Institutional investors in recent quarters have been increasingly adopting a shorter term (opportunistic) strategy towards Singapore CBD office investments as opposed to the traditional longer term (core) income play. Based on YTD 2014 figures, opportunistic investment comprised 68% of total CBD office enbloc transaction value, an increase from the 27% and 25% registered in FY2013 and FY2012 respectively.

Recent examples of opportunistic investments include Prudential Towers and Equity Plaza, both of which changed hands with the consideration to eventually strata subdivide to individual investors and end-users. So why the switch in gear?

The end of cheap money and attractive yield spreads

Quantitative easing by the US Fed ended in October 2014. The recent improvements in the US employment and inflation rate suggest that it is only a matter of time before the Fed revises its target interest rate upwards.

Real estate borrowing costs are therefore expected to rise correspondingly. We understand that core investors are more cautious towards investment in commercial assets due to the 1) compressed yield environment which has tightened yield spreads (Figure 1) and 2) a potential supply overhang when 3.7 million sq ft of office space completes in 2016. This is reflected in the reduction in core investments which has been on a decline since 2013.

Figure 1: CBD Overall Office Investment Yield vs Borrowing Cost

Note: many commercial real estate loans in Singapore are pegged to SIBOR, usually with a premium of 150-200 bps
Source: JLL Research, Monetary Authority of Singapore

Strata subdivision of offices a viable investment alternative

The change in institutional investment strategy has also been driven by strong demand for strata offices, which has been on a rising trend since 2009 (Figure 2). In a recent launch of strata project Havelock II by Guthrie, some 40% of the 50 office units were snapped up quickly, fetching an average unit price of SGD 2,228 per sq ft.

Dominated primarily by seasoned investors and end-users, strata ownership acts as a shield against rental increases in a volatile office market.

Figure 2: Overall Strata Transaction Value

*Data as of August 2014
Source: JLL Research , URA

What’s next?

There remains a strong case in the longer term for institutional investors to continue on this subdivision trend, particularly within the CBD where 1) quality strata stock is rare (currently comprises just 4% of the market) and 2) there is strong demand from owner occupiers looking to hedge against the volatile rental market. Additionally, rising rentals which are expected to be sustained through till 2Q15 should provide additional incentive for opportunistic investors looking to enter the Singapore office market.

About the author
Clement Chua is a Assistant Manager for Jones Lang LaSalle, based in Singapore.

Wong Chuk Hang – the rise of another decentralised office hub in Hong Kong?

Wednesday, November 5th, 2014

Over the past decade, a shortage in the supply of land is largely to blame for the inadequate amount of office space in the Hong Kong office market. With rents in Central among the highest in the world, demand has grown steadily for affordable office space in those decentralised locations seeing rapid development such as Hong Kong East and Kowloon East. However, Wong Chuk Hang, another decentralized location situated in the southern part of Hong Kong Island, should not be overlooked as an emerging business district.

Let’s take a step back and consider the key elements that are required for a decentralised district to attract the banking and finance tenants traditionally found in Central.

1. Firstly, convenient transportation to/from Central.

  • Over the last few years several large banks have relocated their back office operations to decentralised locations which are close to an MTR station. Take Kwai Chung, an industrial area near the city’s container port, as an example. The completion of Kowloon Commerce Centre, a high-spec Grade A office building in close proximity to the MTR station, prompted several large banks including Bank of America Merrill Lynch to relocate part of their back office into the area.
  • The completion of the MTR’s South Island Line in 2016 will help reduce travel time between Central and Wong Chuk Hang to less than 10 minutes.
  • 2. Secondly, sufficient office supply with convenient amenities such as shops, restaurants and hotels.

  • The market needs to be well provisioned not only with high quality offices but also supporting shopping, dining and hospitality facilities.
  • At least 700,000 sq ft of new Grade A office space will be added to the Wong Chuk Hang market over the next several years. As the office pipeline enlarges, more hotels and hip restaurants are opening in the area. Ovolo Hotel, for example, opened its doors to the public earlier this year.
  • 3. Lastly, Rome wasn’t built in a day.

  • In addition to the planned infrastructure and town planning, it takes time to transform a market into a mature business community. Compared to Hong Kong East and Kowloon East, there is a lack of business diversity in Wong Chuk Hang to make it a market focus at the moment.
  • It took Hong Kong East more than a decade to transform from an industrial area into a commercial hub. The relocation of several MNC pioneers into the area attracted further businesses into the area to build the critical mass. Companies in the area now range from consumer products to insurance to technology and telecommunications.
  • I believe Wong Chuk Hang has the potential to draw considerable interest from both end-users and tenants looking for middle and back office space. And with several international banks entertaining the idea of relocating their operations out of Central, it may not be surprising to see a bank moves its back office to Wong Chuk Hang once the South Island Line is operational.

    About the author
    Eric Chong is a Senior Analyst of Research for JLL in Hong Kong.

    Generational shift to drive future office requirements

    Thursday, October 30th, 2014

    What will the office of 2025 look like? Planning for the future is always challenging. To ensure that we make the right decisions to fulfil the future requirements of office workers, we need to better understand the demographic cohort who will make up the majority of the labour force in the next ten years.

    Terms commonly identified with the Millennial Generation include ‘motivated’, ‘well-educated’ and ‘highly mobile’. Roughly speaking, millennials are the generation of people born after 1980 to around 2000. As they advance in their careers, the impact that this group has on society is increasingly becoming more significant. Think, entrepreneurs like Mark Zuckerberg of social networking platform, Facebook; and Elizabeth Holmes, founder of health care and medical technology company, Theranos. Millennials have been behind some of the major, paradigm-shifting ideas and technological advances over the past decade.

    By 2025, millennials are expected to make up 75% of the total workforce globally (Deloitte Millennial Survey January 2014), by which time, the Baby Boomer generation will be well into their retirement. Thanks to the internet and an accelerating rate of globalisation, millennials are developing in a highly connected and fast-paced environment. The constant transfer of new information and communication is what this demographic group have become accustomed to. These technological changes will have major implications for the way we work and the property needs of major corporations.

    Dealing with issues such as global recessions and financial crises, gender and economic inequality, terrorism, climate change, and a growing scarcity of natural resources, millennials have generally become more informed, more technologically-proficient, and more socially and environmentally conscious than previous generations. This will instigate a major shift towards energy efficient construction and building operation.

    As millennials progress and step into senior, decision-making positions within business, further technological innovations will emerge. Technology is a major enabler and disrupter for businesses. Will there still be a need for the traditional office or will alternative methods of working become more prevalent? Collaborative work will require face-to-face time in the future – information is sticky and a face-to-face medium is still required for information transfer. However, advancements in hologram technology may break down some of these barriers. Commercial building owners and developers need to take into account the changing preferences of the millennial generation and the impact of technology when undertaking redevelopment projects to future-proof their assets, and in turn, their future income stream.

    About the author
    Jenny Dong is a Senior Research Analyst for JLL in Australia, based in Sydney.

    Next Generation of Retail Outlets in China

    Tuesday, October 21st, 2014

    On a recent trip, I had the chance to visit Gotemba Premium Outlets, one of the most famous outlet malls in Japan. Sitting at the foot of Mount Fuji, and only a two-hour drive from Tokyo, Gotemba attracts millions of shoppers and tourists each year. Opened 14 years ago, with a mix of high-end and mass market brands, the property is frequently studied as a successful example of outlet mall execution. At 48,000 sqm NLA, this project is an average size by Japanese standards and was a JV between the then-largest outlet developer in the world, Chelsea Property Group (now part of Simon Property Group after a 2004 merger) and Mitsubishi Estate of Japan.

    What makes Gotemba successful? Although the architecture is that of a typical American-style outlet, i.e. outdoor, one-storey and with a large land footprint, the view of Mount Fuji gives the property strong tourist appeal. Second, the outlet can be accessed by multiple modes of transportation, including free shuttle buses from the nearest train station and various buses directly from Tokyo. The outlet also appears prominently on free tourist maps. Finally, the outlet operator pays great attention to detail in marketing and customer service, including the following strategies:

  • The centre’s website can be viewed in six different languages,
  • All areas are handicapped-accessible,
  • There are strollers and wheelchairs available for rent; and
  • The directory not only lists shops, but also points out a Ferris wheel and the best spot to see Mount Fuji.
  • During my visit, besides loads of shoppers being dropped off by bus, I also saw local residents walking their dogs and children having a great time in the playground. It seems the centre is not simply an outlet, but also a friendly community gathering point.

    Is there a Gotemba in China?

    I think the answer is “coming soon”. In my view, China has experienced two generations of outlets. The first generation is represented by projects such as Yansha Outlet in Beijing: big box, simple construction, indoor format, and locally developed and operated. As China’s top outlet by sales, its success lies in its price advantage. Projects such as Tianjin Florentia Village represent the second generation: foreign developer, international style, outdoor and suburban location.

    The third generation, in my opinion, will be projects similar to Gotemba Premium Outlets that offer more than just shopping. The outlet landscape is becoming more and more competitive. Suzhou Village, a recently opened outlet developed by Value Retail Group, has many of the advantages of the Gotemba outlet. It combines a relaxing environment with a view of Yangcheng Lake, lakeside dining, art galleries, and a playground. If Suzhou Village succeeds, other new Chinese outlets will follow suit and offer a more sophisticated shopping environment.

    Today’s consumer is increasingly price-savvy as a result of rising international travel and extensive online shopping exposure. Also, as rents in full-price malls continue to rise, many retailers find outlet locations appealing. Specially-produced “made for outlet” product lines can be offered for the price-conscious consumer. With rising car ownership rates, the idea of a “day trip” outside the city is catching on.

    About the author
    Chen Lou is a Manager in JLL’s research team in China, based in Shanghai.

    Increasing demand for direct assets keeps transactional volumes climbing higher

    Friday, October 10th, 2014

    The inexorable demand for direct commercial real estate remains unabated as we head into the final few months of 2014. North America and Europe continue to set the pace while the slowdown in China means that Asia Pacific is likely to underperform the other regions in 2014.

    Q3 2014 volumes have risen by 13% compared to this time last year, to US$165 billion. All three regions are higher than last year but the Americas remain the standout performer with volumes 23% higher. On a year to date basis global volumes are even more buoyant at US$463 billion which is 23% higher than the first three quarters of 2013. The US$463 billion recorded at the end of 2013 is exactly the same amount as we recorded for the whole of 2012, a good demonstration of how quickly investment volumes and sentiment has continued to improve.

    The divergence in regional performance that we started to see earlier in the year has continued with Asia Pacific lagging behind its 2013 transactional volumes. Much of the slowdown can be attributed to the lack of transactional activity in China where Q3 2014 volumes are less than half of what they were a year ago and volumes are a third lower on a year to date basis. The environment in the other two large markets of Australia and Japan is more positive with year to date volumes in both markets higher than in 2013.

    Strongest growth in 2014 has been in the Americas, where the surging US market has been supported during the year by strong investor interest in Mexico and Brazil. The US passed the US$70 billion mark this quarter for only the second time since 2007 as transactional volumes across a range of prime and secondary cities climbed higher.

    A similar story is playing out in Europe where the peripheral markets of Southern Europe, The Nordics, Benelux and Central and Eastern Europe are all higher and lending substantial support to the big core markets of France, Germany and the United Kingdom who continue to grow. Although European volumes are only 7% higher than this time last year they remain on track to be over 25% higher than 2013 by the end of the year.

    With the positive sentiment around real estate improving we are maintaining our full year forecasts of US$700 billion for the full year. There are slight headwinds to this forecast with a resurgent US dollar meaning more deals will need to be done in Japan and the Euro Zone. Also, the final quarter of the year is traditionally the busiest, but with the number of deals looking to be executed it is possible that some may slip into the first quarter of 2015. However, we do expect the final quarter of this year to surpass Q4 2013 by some margin.

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

    What came first, Rome or the Colosseum?

    Monday, September 15th, 2014

    One of my favourite podcasts is EconTalk hosted by Russ Roberts of the Hoover Institution at Stanford University. Most of the topics covered have to do with the US, but I find that many of the ideas discussed are applicable to the economic environment in China, and have helped to shape my views on the country’s real estate development.

    In a May episode about how city planning in the US after the Second World War led to cities experiencing high levels of debt and wasteful infrastructure investment, I could not help thinking of China’s current economic development strategy and its overarching plan to integrate the municipalities of Beijing, Tianjin and Hebei Province into the Capital Economic Circle. In fact, the podcast is the basis for some of the key ideas incorporated in our recently released white paper, Strengthening China’s Next Economic Mega-region.

    One podcast guest noted, “There’s a seductiveness to go in and have the big flashy thing that you believe created the success in the neighbouring city. Historically – I like to point out that Rome didn’t get the Colosseum and then build Rome. The Colosseum was the by-product of centuries of success.” This comment elucidates one of the major problems with the Chinese government’s current approach to economic and real estate development, and a key reason why the integration of Beijing, Tianjin and Hebei Province is important. Local governments can no longer copy each other’s “if you build it, they will come” strategies or build unneeded iconic structures and expect successful outcomes. By adopting duplicative development strategies, each local government is creating excess capacity and space based on demand that has yet to materialise.

    The Colosseum in Rome

    In our white paper, like the guest on the show suggested, we recommend that local governments shift their strategies away from taking active roles in real estate development and instead let the private sector take the lead. The private sector is better at allocating resources and ensuring that any new projects that are built are financially viable. In essence, the private sector tends not to construct a Colosseum before there is a Rome.

    To find out more about our suggestions to the government and information on how real estate investors can benefit from China’s next economic mega-region, read JLL’s latest white paper, Strengthening China’s Next Economic Mega-region.

    About the author
    Durrell Mack is the Head of Research for JLL in Tianjin, China.

    Singapore Strata Office Space: More Room for Capital Appreciation?

    Friday, August 8th, 2014

    The strata office scene in Singapore has been witnessing a surge in investment interest in recent years. In less than five years, since January 2010, developers have sold 1,208 units of new strata office space, almost twice the 693 units sold in the 15 years preceding 2010. Although strata office space is not new in the market, it accounts for a tiny proportion of the overall stock of office space, which is dominated by larger en bloc developments. The limited availability of strata office space hence attracts the likes of investors searching for alternative asset classes and business owners looking for a suitable space to house their operations over the long term. The healthy demand has likewise supported the appreciation of prices for strata office space, creating a cycle that has drawn more capital into the market.

    Already, some strata office space sold by developers in recent years has been divested for profit way ahead of its completion. A transaction is classified as a sub-sale if resold prior to completion of the development. Based on the latest sub-sales data released by the authorities, strata office space developments currently under construction resold for an average 13.6% gain. Projects in the suburbs posted an average gain of 14.2%, ahead of the 9% gain recorded by similar projects in the CBD. Nevertheless, based on sub-sales records since 1995, completed strata office projects have historically posted average gains of 22.1% during their sub-sales period.

    As such, prices for strata office space currently under construction could have more room for growth, playing catch-up to past averages. The potential growth may also be boosted by the limited availability of new strata office space expected in the near term.

    About the author
    Cedric Chng is Senior Research Analyst for JLL, based in Singapore.

    Lack of a property tax is leading to oversupply in the commercial sector

    Monday, June 16th, 2014

    When I look out our office window and see the amount of construction taking place, I cannot help but think that the government needs to implement a property tax. Normally, I would not be an advocate of a tax of any kind, but local government dependency on land sales and commercial development are leading to oversupply in the commercial markets across China.

    View from my office window of the construction of a 600-metre-office tower

    At present, local governments generate a large portion of their tax revenue by selling land to developers. As local government debts have risen, local governments have needed to sell more land. The most highly sought after land is residential land, because residential units can be pre-sold to generate a quick cash flow, and because residential projects have been highly profitable for developers over the past decade. However, for local governments, the sale of residential land only leads to revenues on the initial sale of the land and when the units are sold. Thus, local governments have been trying to encourage developers to buy more commercial land, which in theory can generate taxes in perpetuity from the ongoing business activity.

    To incentivise developers to purchase commercial land, the government couples the commercial land with residential land. The problem with the coupling is that local governments allocate commercial land in places where large residential projects are viable, but where a commercial project is uneconomical. In addition, the local governments tend to be too involved in the designs of the commercial areas, instead of letting the developers design commercial projects that might be better suited for an emerging area.

    In Tianjin, a prime example can be found on the western outskirts, where a nearly 600-metre-high office tower and adjoining business district complete with convention centre, Broadway-style theater, retail outlets, two hotels, twin office towers and an entirely new residential catchment is under construction, effectively creating a new city in a suburban district. Currently, the area is primarily an industrial and manufacturing catchment and does not warrant an office tower or commercial development of such a size.

    Instead of trying to obtain future revenues from commercial areas that might not be commercially successful for years, if ever, the government should focus on a large potential tax base that already exists, the hundreds of millions of homeowners. The government has already moved in the direction of tapping this tax base with pilot property tax programs in Shanghai and Chongqing and the development of a nationwide property registry. By having a steady revenue stream from homeowners, local governments will have less of a need to sell land, especially commercial land.

    A property tax would have the benefits of incentivising local governments to invest in their areas, as increasing property values could then result in higher taxes, and give local governments in need of tax revenue less of an incentive to encourage developers to build commercial space they do not want and that the local area does not need.

    About the author
    Durrell Mack is the Head of Research for JLL in Tianjin, China.

    Are Sydney Premium Rents Inflated?

    Monday, May 19th, 2014

    Sydney is the only Australian CBD market where the prime vacancy rate is higher than the secondary grade vacancy rate. Sydney is the second tightest office market in Australia (10.5%, after Melbourne at 10.4%), but prime grade vacancy is 12.4%, the highest level in Australia, and the highest level since JLL started tracking vacancy by grade in 1994. Meanwhile, secondary stock is relatively tight at 8.5%. This may seem surprising on the surface, as during times of high vacancy and declining rents, there tends to be a “flight to quality” – where tenants take advantage of available space and generous incentives to upgrade their accommodation. So why is Sydney’s CBD prime grade vacancy so high in comparison to other Australian CBDs?

    Firstly, a lot has to do with the make-up of tenants – financial services firms are Sydney’s largest occupiers, and are traditionally occupiers of prime grade accommodation. Since the financial crisis in 2008, financial services firms have been in a process of corporate space rationalisation and consolidation. Deloitte Access Economics reports that the number of people employed by financial services companies has declined by 5.6% from 2008 to 2013. This is equivalent to 54,000 sqm of office space based on a workspace ratio of 1:14.

    The prime grade vacancy rate has been driven upwards of late by the large vacancy in premium-grade buildings. It is at 14.4%, which equates to over 100,000 sqm of office space. Occupiers of premium space in Sydney are typically investment banks and professional service companies, such as law firms and accounting firms. These tenants have traditionally a high work space ratio. Larger corporations are rationalising and cost cutting, which includes shrinking their average workspace.

    Another reason Sydney has not seen the flight to quality that some other markets have recorded is the rental premium that prime-grade buildings demand. There is a 54% differential between Sydney CBD prime and secondary gross effective rents. To put this in context, in Melbourne the differential is only 35%. Furthermore, premium gross face rents are 36% higher than A-grade rents, well above the ten-year average of 29%.

    Due to the above factors, it is likely that in the medium term premium grade stock will continue to have a higher vacancy rate and lag A-grade and secondary rental growth. Premium rents appear inflated. The sub-dividing of floors to attract smaller tenants may satisfy the desired rental returns in some cases, but there is a finite supply of these types of tenants. A reduction in vacancy will need to come from large corporate occupiers and in the current market conditions, getting these tenants to lease more space is a difficult task. Furthermore, the current demand outlook for the NSW economy suggests Education, Technology and Health will contribute a higher proportion of white-collar workers than previously. These groups are not traditional users of premium grade buildings. Owners of premium grade buildings will need to decide if they will lower their effective rents to make their office space more competitive with lower-grade stock, or risk longer-term vacancy if the physical market does not improve markedly.

    About the author
    Alex McColl is a Market Research Analyst for JLL, based in Sydney, Australia