Archive for the ‘Commercial Property’ Category

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

A Respite From The Large Singapore Office Supply in 2016

Thursday, April 3rd, 2014

JLL estimates that close to 4 million sq ft of new office space is expected to complete in Singapore in 2016, a historical high since 1997, and exceeding the 10-year average annual island-wide demand of 1.5 million sq ft. The large pipeline in 2016 thus poses some concerns for the market.

With more than half the supply pipeline in 2016 – almost 2.5 million sq ft – attributed to a single office space project jointly developed by the Singapore and Malaysian governments following a land-swap deal in 2010, the vacancy level in the CBD could rise.


Source: JLL Research 4Q13

However, from the chart depicting the upcoming completions from 2014 to 2017, it should be noted that the Singapore office market is expected to face a supply drought in 2015 and 2017. These periods of limited new supply could thus provide some respite from a potential oversupply situation in 2016, should the construction duration of the other projects quicken or be delayed.

Already, several office developers have reportedly been observed to make regular revisions to the target completion dates of their projects, even when developments are well into their final phase of development. Some examples in recent years include MND Building, which was completed earlier than initially expected, and Orchard Gateway that saw its initial 2013 target completion delayed to 2014.

With the bulk of the supply pipeline being in the CBD, the market is also likely to experience a quicker take-up due to its prime commercial location and better office specifications that are available to office occupiers. Along with efforts by the government to transform the CBD to include more lifestyle amenities, these factors could thus support the Singapore office market in mitigating the large oversupply situation in 2016.

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

The Potential Reinvention Of South Sydney

Wednesday, February 5th, 2014

When considering the characteristics of a strong commercial office precinct, success is not only determined by aspects of the market like modern, efficient floor space or the relative affordability of rent. Peripheral factors like access to public transport nodes, the surrounding employment catchment pool and geographical amenity also play a major part in corporate office location rationale.

The evolution of Sydney’s metropolitan commercial office precincts solidified in the last quarter of the 20th century. The CBD, Sydney’s core market, is the 5.0 million sqm white-collar heart of the city, accommodating the majority of national and international finance, legal and insurance firms. Across the bridge to the north, commercial precincts stretching along an arc across the North Shore from North Sydney, through St Leonards and Chatswood and ending in Macquarie Park have become synonymous with the telecommunications, pharmaceutical and technology sectors.

What about South Sydney? Located just 7 kilometres from the Sydney CBD, the South Sydney office precinct, clustered around Mascot, is the gateway precinct to economically important Sydney Airport and Port Botany and has long been associated with Sydney’s Logistics and Transport sector. In the last decade or so, new road infrastructure, large development land holdings and the relative affordability of the outer west has seen the departure of many industrial occupiers from South Sydney’s industrial areas (many taking their office operations with them). There has been a noticeable impact on the small South Sydney office market – vacancy has ballooned to 20.5%.

South Sydney needs a new identity and it has a lot of factors in place to achieve it.

Traditionally a blue-collar, working class area, the whole of South Sydney has undergone significant gentrification over the last two decades. New South Wales Government “in-fill” initiatives, which set targets of 60%-70% of all new housing to be built in established areas from 2005-2031, has created significant population growth within South Sydney. The Australian Bureau of Statistics (ABS) reported a 41.5% increase in the population of the City of Sydney local government area over the 2001-2011 period (which incorporates the South Sydney suburbs of Alexandria, Zetland and Waterloo). The City of Botany Bay, which incorporates the southern commercial areas of Mascot, Botany and Rosebery, grew by 12.0% over the same time period.

Demand for inner-city living has attracted the demographic of a younger, highly-educated, more affluent population. For example, people with a bachelor degree or higher increased 44% in the five-year period from 2006-2011 (ABS Census) in the suburb of Alexandria and an 18.4% increase was recorded in Mascot.

The South Sydney precinct has New South Wales’ top three ranked universities within a 10km radius and is serviced by growing social amenity in areas like Danks Street and Alexandria. With an increasing population of young, well-educated workers and comparative rental affordability when measured against established commercial office locations such as the CBD and Sydney Fringe, South Sydney has an opportunity to significantly grow its commercial office base in the coming decade and even reinvent itself as an innovation hub, competing to accommodate Sydney’s creative, media and technology industries in the future.

About the author
Rick Warner is the Strategic Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.

Shanghai’s New Land King

Thursday, September 19th, 2013

Two weeks ago Sun Hung Kai won an auction for a development site in Shanghai with a bid of US $3.5 billion. This was the second largest amount ever paid for a single development site in China.

Over the last several years we have been retained to conduct market studies on this particular site by several different developers from around the world, although never by SHK. The site is located in Xujiahui, a key retail precinct in the Southwest part of the CBD. It is perhaps the last large scale site for mixed use development in a prime location, hence the intense interest.

Although in the CBD, Xujiahui has never been considered an important office location, but from a retail perspective there are few places that rival it in Shanghai. From our perspective, the key challenge for this site – given that it has both office and retail components – was to not get bogged down in trying to compete with the Premium Grade A offices in the core CBD, but focus on maximising the retail potential.

In the end, it makes perfect sense that SHK was able to make the highest bid. They have a strong asset management team on the ground and have executed extremely well in Shanghai so far. ifc in Pudong is one of the best mixed-use projects in all of China and ICC in Puxi is nearing completion, with the shopping mall having just opened. If anyone was going to be able to bet big on hitting a home run with a large retail project in Xujiahui, it is SHK, plus it fits their profile for this kind of development with a large catchment area and multiple metro lines converging underneath.

Whether SHK choose eventually to sell the office portion of the project to owner occupiers, we won’t know for a long time, but this investment can be taken as a big vote of confidence in the future of the retail market in Shanghai. They clearly believe that they can develop another large successful scheme and not dilute the catchment area of their existing projects.

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

Perspectives On Commercial Real Estate Portfolio Allocation in India

Tuesday, September 17th, 2013

Many factors influence decisions about buying or leasing property. Real estate costs represent a significant business expense. Not only Fortune 500 companies but also mid and small-cap companies are undertaking portfolio reviews because they impact any future own versus lease decision. We look at some key factors for occupiers in their decision-making.

Flexibility: Two things are desirable for an occupier: first, taking advantage of the property cycle and second having assurance and comfort of critical functions not getting disturbed owing to end of lease tenures. This can be achieved by ensuring flexibility through a combination of owned and leased assets with specified allocations to ownership and short-term, medium-term and long-term leases. This type of allocation ensures that occupiers can vacate sites with near-term lease expirations at any time. Alternatively, some percentage of ownership acts as a hedge against increasing leasing costs.

Capital Allocation: It is important to separate the real estate capitalisation decision from the business unit site location decision. Often, business units are measured on a financial reporting basis and skewed towards an ownership preference based on the lower expense profile associated with a long depreciable life and the low or no cost of capital charge. A more efficient approach is to charge business units with a fair cost of capital on capital employed and apply a suitable depreciable life. In addition, occupiers also need to substantiate the following capital allocation implications:

  • Is there sufficient cash reserve on the balance sheet?
  • Is the short- and medium-term capital expenditure significant against reserves?
  • Is the hurdle rate higher than property yields?
  • Property Market Implication: Timing plays a vital role in an occupier’s decision to buy or lease. While cyclical lows in financial indicators of rents and capital values support owning or leasing of commercial assets, owning a property is typically for a longer holding period and the cyclical peak discourages buying and supports short-term leasing with renegotiation clauses. The occupier’s decision to occupy or lease is influenced by the following property market implications:

  • Is the micromarket susceptible to significant property cycle risks?
  • Are there significant environment management issues related to ownership?
  • Are there significant restrictive covenants applicable?
  • In the period from 2Q10 to 3Q11, India’s office real estate provided a strategic window of opportunity for both buying and leasing commercial real estate, with both rents and capital values at their cyclical lows. From 2010 to mid-2013, the country’s leasing and buying volumes together breached the 100 million sq ft mark, and this is forecast to cross 120 million sq ft by end 2013. Market conditions are likely to remain generally neutral in the short-term, although the latter part of 2013 is likely to see moderate increase in rents and capital values in select locations and further strengthening is expected post 2013. The Bangalore office market is expected to lead the recovery, followed by Mumbai and NCR-Delhi.

    Moderately rising rents and capital values have given occupiers in India an unusually long window so far for decision-making, and with supply correction in place, this window will not be available for long. Hence occupiers must take their real estate decision sooner than later to ensure benefits of the current situation.

    About the author
    Karan Khetan is the Assistant Manager for Jones Lang LaSalle in India, based in Mumbai.

    Re-position proposition: Sydney CBD

    Thursday, September 5th, 2013

    Sydney’s Opera House is 40 years old this year. But 25% of Sydney’s CBD office stock is even older. With my recent arrival from New Zealand, I had anticipated a modern CBD office landscape that reflected the largest city in a country that has recorded 21 years of continuous economic growth. However, almost half of the Sydney CBD office stock reflects design characteristics of the 1980’s or earlier. The age profile of Sydney’s stock suggests scope for a major refurbishment cycle. Closer analysis of all these factors presents a clear re position proposition for many of Sydney’s aged office assets.

    Generally office buildings require a major refurbishment every 20-25 years to remain competitive. Timing of when to offer the re-positioned asset back to the market is crucial to leasing success. The lifecycle of the building, property cycles and economic conditions are also key aspects to consider to mitigate the future risk profile for any potential asset re-positioning.

    Property cycles are a pivotal influence on the timing of any re-positioning project. These include the spread between prime and secondary vacancy rates, rental levels and cap rates. Trends in each of the three metrics can act as a good guide as to when to re-position.

    For example, the yield gap between prime and secondary office assets currently sits at a historically wide 225 basis points for the Sydney CBD. This may present opportunities for investors with a higher risk tolerance to enter the market and purchase secondary assets that have vacancy risk already priced in. Applying a thorough refurbishment program and re-positioning the asset to a higher standard, with the ability to realise future rental and capital value growth, is an attraction for ageing secondary assets with short WALE.

    With 46% of Sydney office buildings in excess of 30 years, a high proportion of buildings are beginning to reach their anticipated lifespan. In some cases, obsolescence is a reality for office building owners. With the domestic economy expected to grow below-trend over the 13/14 financial year, we believe landlords of office in Sydney should be formulating a strategy to protect the value of their ageing property assets.

    We expect that the wide spread between prime and secondary assets is likely to persist over the next few years. The divergence between prime and secondary assets, and the market conditions that currently exist, give a strong case for a re-positioning strategy. If a thorough refurbishment process is undertaken and the product differentiated with an improved lobby, end of trip facilities and services, the building will be competitive with competing properties in the market. By rejuvenating a building owners are able to extend the life of the asset and optimise the building’s investment performance.

    About the author
    Jonathon Bayer is the Senior Research Analyst for Jones Lang LaSalle in Australia, based in Sydney.