Archive for the ‘Finance’ Category

Are Savings Just Thin Air?

Thursday, April 25th, 2013

On a trip back to Scotland a couple of weeks ago, what jumped out at me was how much better the air quality was in comparison to Hong Kong.

This is far from a new topic, but realistically how do we address air quality in emerging Asia? In thinking of the interest groups and stakeholders involved this reminded me of the dilemma originally raised by ecologist Garrett Hardin. His theory tackled the socio-economic dilemma of a group of individuals when sharing a common resource. Known as “the tragedy of the commons,” this theory can be applied to a myriad of scenarios when society shares a common resource – in this case the wider environment.

In its simplest sense, the theory references the practice of medieval common grazing by herdsmen for their cattle. It goes something like this. Any single herder will have a personal motivation to add one more cow to his herd, because even if the results of adding additional cattle to his herd cause overgrazing and damage to the pastures, the herdsman receives all the economic benefit of adding those additional cattle, whilst the damage to the lands is shared by all.

Now, I’m not going to solve the air quality issues in Hong Kong in 500 words, but what is clear is that we all have a stake and responsibility in tackling these issues and this applies as much to real estate professionals just like myself. With a significant proportion of energy consumption being taken up by real estate, globally we have a duty and a responsibility to drive forward change to improve the impact we have on our “pastures.”

Now what Hardin did not address in his paper was technology. Technology provides solutions to problems. Yes we can legislate, but the winning argument in relation to real estate in this debate in my mind is simply the bottom line. When businesses start to see the savings and benefits to their bottom line of adopting more sustainable new technologies in real estate, adopting new best practice will just become the natural course. Technology is already moving fast and the real estate industry has some brilliant technologies at hand already.

The savings from sustainability are very real, not just on the impact we have on our “pastures” but on the bottom line. A great example is our new LEED Platinum office in Hong Kong. Our new office consumes 13% less energy per sq ft and better air quality has greatly improved the environment, indeed we’ve seen a 32% reduction in absenteeism.

I’m not saying technology has all the solutions now and that the payback times and the investment are not prohibitive at times. However, what is true is that the more it’s adopted, the more the costs will come down making it a more viable option.

A project we undertook in New York on the Empire State Building is a great example of how savings can be made even today. Not only did we deliver a project to improve sustainability which would pay for itself in three years by saving US$4.4m per annum in energy savings, the energy reduction and thus the impact on the planet, was in the region of 38%.

So the lesson is this, not only is the technology here to save us from a similar “tragedy of the commons,” but it’s improving every day. The savings to the bottom line are real and it’s up to us as real estate professionals to promote best practice in our industry. We can’t solve transport and factory pollution; however, with a little effort from all stakeholders, there will be some very tangible benefits for the wider environment and also the bottom line of developers, tenants and landlords – our clients.

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

Posted in Affordability, Air Quality, Asia Pacific, Asia Pacific Economy and Property Markets, Commercial Property, Corporate Real Estate, Economic Research, Economy and Real Estate Markets, Finance, Hong Kong, Occupier Strategies, Pollution, Real Estate Research, Sustainability, Technology, Urban Issues, Workplaces | No Comments »

The Irony Behind Low Interest Rates In Singapore

Friday, October 5th, 2012

Four years after the collapse of Lehman Brothers roiled global markets, the US unemployment rate still stands at a stubbornly high 8.1%, and economic growth, as of 2Q12, is now languishing at a low 1.3%. The weak economic picture remains, despite the slashing of interest rate levels to extremely low levels not seen since the Great Depression and the subsequent introduction of the quantitative easing program (QE), which saw the US Fed injecting liquidity into the economy through buying of asset securities.

As US policymakers scramble to find more ways to accelerate growth, the Singapore government has been introducing successive rounds of cooling measures to minimise speculative residential sales activity and tame the strong growth in housing prices; thanks to the low borrowing costs which mirror the US Fed’s rates. Although not totally immune to the onslaught brought on by the collapse of Lehman Brothers, the private residential property price index saw a strong rebound in 2009, surpassing the pre-Lehman level and the historical peak seen before the 1997 Asian Financial Crisis. These government measures have however driven retail investors to invest in other assets, such as industrial and commercial properties.

While low interest rates traditionally benefit investors, they also tell a deeper story about the state of the economy. The motivation behind the Fed’s decision to keep interest rates low for a long period stems from the grim outlook of the US economy, which is still struggling to gain growth traction. Ironically, investors seem to be missing the rationale behind the low rates in Singapore and see the long period of cheap liquidity as a golden opportunity to invest more cash into real estate.

Unlike the US, which controls growth via interest rate policy, Singapore manages its growth through the exchange rate policy by adjusting the pace of its domestic currency’s appreciation against an undisclosed basket of currencies. The borrowing costs in Singapore closely mirror the US Fed’s rates, which are expected to stay low for an extended period of time and have prompted policymakers to introduce a slew of cooling measures and policy changes to weed out potential speculators.

Despite Singapore being one of the few AAA-rated Asian countries thus justifying the inflow of investments, its strong reliance on trade and exports means that the economic performance of its larger US and European counterparts cannot be ignored. The recent introduction of QE3 and the decision to extend the low interest rate level, which was previously set to finish in 2014, to 2015 are the results of the blow to market confidence caused by the ongoing sluggishness of the US economy and EU debt crisis.

Once again, the extension of the Fed’s policy tools is a testimony to the bleak outlook of the global economy. While one would hence expect the weak economic fundamentals to hold back further growth in asset prices, a strong boost to asset prices has traditionally followed QE programmes. That being said, the recent QE3 would likely keep Singapore policymakers alert; heightening the risks of additional cooling measures by the government.

About the author
Cedric Chng is a Research Analyst for Jones Lang LaSalle, based in Singapore.

Posted in Finance, Singapore | No Comments »

Global Retail Banking – Prepare Today Or Fail Tomorrow

Monday, August 6th, 2012

Despite the stress tests, western banks are facing many unknowns. How far will slow economic growth or any rises to interest rates cripple the banks’ loan books? How quickly could sovereign insolvency and bank illiquidity lead to a meltdown of confidence, a drying up of the interbank market and a second credit crunch? To what extent will regulation force restructuring in the banking industry? Which bank is the next to fail or to need government support? Will it be ‘too big to bail’?

Meanwhile, the picture in the developing and frontier markets could not look more different. Increasingly decoupled from the USA and Europe, Asia is moving toward a self-sustaining cycle with on-going trade surpluses raising domestic demand. Banks in China, India and beyond cleansed a lot of their bad debts in the 1990s and capital ratios are in better financial shape than in the West. Despite occasional nervousness about bad loans, and a marginal weakening in economic outlook, the still strong GDP expansion means that overall banks in developing countries are looking forward to a decade of profitable growth.

In both contexts, it is better to predict, assess probabilities and prepare than to sit back and become the victim of future changes or ill- informed decisions. Jones Lang LaSalle researchers have combined desk research, expert interviews and industry round tables across three continents to derive a plausible vision of where retail banking is headed internationally. Three major trends stand out:

  1. Power to the people: Banks can no longer rely on customer loyalty or inertia: their customer base is increasingly mobile, savvy regarding their finances, demanding, prudent and untrusting. Easy finance, good ethics and independence are the way to go. These dynamics will accelerate the move to online banking, place a greater emphasis on service in branches and catalyse a drive to target the wealthier segments with a differentiated offer.
  2. Technology—the game changer: Customers’ love of internet banking means that it will become the key touch point. As in retail, technology—and mobile banking specifically—is the game changer, particularly in the developing world. Its impacts will be felt in channel integration, smaller branch networks, non-bank led disintermediation and the configuration and targeting of international roll-out programs. Online platforms are opening the way for non-bank competition without legacy systems or branch networks to enter the market.
  3. Image is everything: Western banks will be working to claw back lost trust to ensure that, by decade’s end, their tarnished image will have turned positive once more. They will up the ante in innovation—for different target customers and within the branch network. Promising areas for innovation include Shariah finance, delivering ‘social value’, and managing intelligence.

Read our Global Retail Banking 2020 report to find out what the knock-on effects of these trends will be on branch numbers, branch networks and banking environments.

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

Posted in Corporate Real Estate, Finance, Retail Research | No Comments »

Debt funding opportunity is also a necessity to recovery

Tuesday, July 3rd, 2012

In Australia, debt investing is the new black – except for commercial real estate. Risk aversion has been pushing investors to increase their allocations to fixed-income securities with clear preferences for safer sovereign, semi-sovereign and high quality corporate debt. Yields on Australian sovereign debt securities are at all-time lows –around 3.1% (10-years).

When it comes to Commercial real estate, the retreat of foreign banks, 2nd tier lenders, securitized debt (CMBS) as well as non-bank lenders through the financial crisis has left a noticeable gap in the lending market. This dislocation of lending markets and reduced competition has left the four major tier 1 commercial banks with a large share of the commercial real estate lending market in Australia. Furthermore, the appetite of these banks to expand their credit books on commercial real estate is limited with flat (or slightly negative) credit growth in the sector over the past few years.

Surprisingly, foreign investors who have shown persistent demand for commercial real estate on the equity side have displayed less interest in the Australian debt markets. Perhaps foreign banks requirements to repatriate capital as a covenant to ensure deposit insurance through the financial crisis was a necessary evil. However, the return foreign investors in Australian fixed-interest investment as a whole have been positive. At present, nearly 80% of all Commonwealth Government Securities on issue are owned by offshore investors.

As a result, an opportunity exists for other sources of debt finance to enter the market and take advantage of both the lack of competition as well as the attractive returns on offer. Benchmark lending rates and longer-dated swap rates in Australia remain high compared to other mature markets and margin spreads remain well above historical averages.

This lack of competition also has lenders on the right side of the negotiating table. Loan covenants remain both flexible and favorable from a lending perspective as do conservative LVRs and market fundamentals. Importantly, the cap rate decompression cycle seen through the financial crisis has improved debt serviceability on new loans. Incomes have steadied and lending margins have improved through the recovery to give further support to interest coverage ratios.

Borrowers for the most part are also looking to diversify their funding sources and extend the maturity profile of their debt. Small and mid-size groups that are unable to obtain a credit rating and access capital markets have limited options. Despite the gap that exists in the market, it’s hard to see a large resurgence of 2nd tier, non-bank and offshore lending in the short-term, given the global economic conditions.

Perhaps it is more a case of limited access to debt, rather than the cost of debt, that is holding cap rates steady. Whilst we don’t forecast any substantial yield compression in the short-term, the current low cost of capital is supportive of a compression cycle if it were maintained over the medium-term. Therefore, improved availability of debt is the key to achieving any substantial downward pressure on cap rates over the medium-term.

About the author
Nicholas Wilson is a Senior Analyst for Jones Lang LaSalle, based in Melbourne, Australia

Posted in Australia, Capital Markets, Finance, Investment Research, Real Estate Research | No Comments »

The Case Of Risk-Adjusted Returns In HCMC Landed Housing

Monday, April 16th, 2012

When Indochina Capital introduced their newest villa project in Ho Chi Minh City (HCMC) in late 2011 amidst a property market downturn, I began to think the landed housing sector in the city might appear on the radar of institutional investors. Over the past few months, I have found out that investors are indeed viewing this sector favourably due to its limited supply pipeline and niche target market.

Apparently, it is not just landed housing that is on investors’ radar. In fact, it is not just real estate, as numerous opportunities may arise in times of economic downturns when valuations become attractive. This has probably been the case in the equity market, for example. As a matter of fact, M&A deals in Vietnam in 1Q12 totalled USD 1.5 billion, the eighth highest in Asia Pacific ex-Japan, according to Thomson Reuters.

So how has real estate (and landed housing in particular) performed compared with equities? This question prompted me to take a quick look at comparing risk adjusted returns among these types of investments.

I started with proprietary Jones Lang LaSalle quarterly data on average prime condominium and villa prices, together with quarter-end closing price levels of the VN-Index – Vietnam’s benchmark stock index comprising companies listed on the Ho Chi Minh City Stock Exchange. The time period chosen starts from 4Q06 (when Vietnam’s accession into the WTO was approved) to 1Q12. This set of raw data is then used to calculate time-series data of annual returns that could have hypothetically been realised at quarterly intervals. “Returns” in this context refers purely to capital gains in local currency terms and ignores dividends and rental income.

Figure 1 below shows that the VN-Index during the stock market’s heyday yielded the highest rate of annual return, but also yielded the lowest return seen in the time period studied. On average, returns on villas were the highest at over 20.0% per annum.

Figure 2 below further shows that annual returns in the villa sector have the lowest standard deviation – a measure of risk. Combined with the previous findings, the villa sector is found to have the highest Sharpe ratio – a measure of risk-adjusted performance.

While there are lots of caveats to this mini study (e.g. returns only incorporate capital gains, transaction costs are not accounted for, the Sharpe ratio in its simplified form assumes a constant risk free rate, etc), I am hopeful this is a good starting point to further examine this topic. We may also extend this to include returns on commercial real estate when capital value data in this sector become more readily available.

For now, we know that Indochina Capital did their homework.

About the author
Trung Thai is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Finance, Investment Research, Residential Research, Vietnam | No Comments »

Finance Sector Job Cuts Are Unlikely To Impact Office Markets

Thursday, January 26th, 2012

Rumours of headcount reductions in the Australian finance sector have quickly turned into formal job cut announcements following continued financial turbulence stemming from European sovereign debt issues. UBS reportedly predicts Australian banks are likely to shed 7,000 jobs over the next two years to offset the country’s weakest credit growth since World War Two. This would represent the largest downsize in the finance sector since the mid-90’s.

While these announcements grab the market’s attention and are a negative for sentiment, the headline figures, as well as the flow-on effects, are relatively benign. Let us assume that all job losses will be entirely limited to the major CBD office markets and apply a generous workspace ratio of 15 sqm per person. The total possible reduction in space occupation is only 105,000 sqm. This equates to a rise in vacancy of 0.65% across total CBD stock over two years. Pragmatically, this figure is likely to be much lower. Even if these losses are confined to Sydney and Melbourne CBD markets the impact on occupied space is only 1.1%.

Major banks are single tenants in a number of office buildings around Australia’s major finance centres. Anyone familiar with banks’ security measures would know that they are more likely to retain excess space and forego a small cost saving than they would be to compromise the integrity of their security by subleasing space to other tenants. Occupancy costs account for only around 10% of banks’ total operating costs, compared to nearly 60% for staff costs and 12% for IT. Therefore, any small occupancy cost saving would pale in significance to both the reduction in salary costs as well as the higher funding costs that banks are facing in 2012.Initial capital raisings from major banks show both nominal bond yields and spreads over swap rates have moved higher in January as bond investors seek higher returns in the non-government debt markets.

The banking sector faces a number of challenges in the year ahead; however, reported job losses are unlikely to significantly impact the domestic office markets. The poorer conditions in financial markets are likely to be short-lived. Continuing population growth, a forecast recovery in housing investment and a broad-based upturn in 2013/14 is likely to boost demand for credit. This in turn would have a positive impact on Finance & Insurance sector employment over the medium-term and could flow through to benefit Australia’s major financial centres.

About the author
Nicholas Wilson is a Research Analyst for Jones Lang LaSalle, based in Melbourne, Australia.

Posted in Australia, Commercial Property, Employment, Finance, Office Research | No Comments »