Archive for the ‘Industrial Research’ Category

Secondary Grade Industrial Asset Pricing: A Rising Tide Lifts All Boats?

Tuesday, March 26th, 2013

The commercial property investment market in Australia is heating up. Industry practitioners and commentators are again focused on yield compression. Most discussion has been about how much yields will compress this year, not if it will happen.

The majority of analysis has focused on the prime segment of the market. The Jones Lang LaSalle Research view is that further moderate yield compression for prime grade assets is likely this year; better quality assets – or ‘super prime’ assets – will see the majority of yield adjustment, resulting in wider spreads in the prime yield range and wider spreads to secondary assets.

What of secondary grade asset pricing? What ever happened to the phrase “a rising tide lifts all boats”?

I have outlined three reasons why secondary grade industrial asset re-pricing could occur in 2013:

  1. Yield spreads. Average secondary grade yields are at historically very high spreads to prime grade assets and government bonds and the spread within the secondary grade yield range itself is historically wide.
  2. Changing sentiment. More investors are indicating they will go up the risk curve this year. A number of institutional investors plan to start value-add style industrial funds. Sentiment toward both value-add investing and the industrial sector as an asset class is shifting favourably.
  3. Demand and supply. The volume of secondary grade asset sales decreased in 2012. The sell down of ‘non-core’ assets by institutional investors is winding up. At the same time, private investors – who dominated the purchaser environment in 2008 and 2009 – are coming back into the market. The debt market is now more favourable for leveraging into higher yielding assets. Meanwhile, the return on fixed interest investments has deteriorated in line with lower interest rates.

Purchasers of industrial assets will review three key factors when assessing opportunities:

  1. The tenant – income quality and duration of lease term
  2. The building – age and specification of the building
  3. Location – close to major road infrastructure, ports, customers or workforce

Investors may decide two out of three isn’t bad and accept a shorter lease expiry profile for a good building in a good location. Or decide a poor building in a good location with a strong covenant and long WALE is acceptable. We generally don’t expect firmer pricing for assets that are only strong on one of these criteria.

Watch closely for evidence of secondary grade price firming throughout the year. This may result in even wider spreads in the secondary yield range as better quality secondary assets are re-priced. We don’t expect that there will be a sufficient shift in the risk appetite of investors this year to warrant significant tightening at the upper end of the secondary yield band in most markets, given it remains a tough selling environment for this type of asset.

We retain our central house view that prime grade yields will firm this year and the average yield spread to secondary grade assets will widen further. At some point though, investors will step in and absorb some of this growing spread. Time will tell.

About the author
Nicholas Crothers the Director of Industrial Research for Jones Lang LaSalle in Australia, based in Sydney.

Posted in Australia, Construction, Industrial Research, Investment Research, Valuation | No Comments »

What’s Next For Offices In Industrial Buildings?

Monday, March 4th, 2013

Industrial developments in Singapore must comply with the 60/40 rule, which requires 60% of their total GFA to be used for industrial activities and allows the remaining 40% to be ancillary space, such as meeting rooms and common facilities. However, local authorities have reported a growing number of tenants flouting the rule by dedicating more than 60% of their properties’ GFAs to commercial use, which has partly caused industrial rents to rise, riling many bona-fide, cost-conscious industrial tenants. Given this, since late 2011, the authorities have introduced several policy changes and measures to address these issues, which include increasing the monitoring of current industrial tenants that may be breaking the 60/40 rule.

Anecdotal findings showed that the non-compliant tenants were mainly from small businesses including professional service industries. The authorities have served some of these tenants notices, which demand compliance with the 60/40 rule. Furthermore, a few tenants were served eviction notices.

However, evicting non-compliant tenants on a massive scale with short notice would create large socio-economic repercussions. Under such conditions, market distortions would follow the resulting surge in office demand and increased vacancy in industrial space. Also, business owners are likely to have limited options for relocation. Currently, most office developments are within the city and regional areas, with floor plates catering largely to medium-to-large-sized firms. This causes the majority of small businesses, which typically look for smaller spaces outside of prime office areas to benefit from low rents, to face a mismatch in space expectations as such requirements are lacking in the current office landscape. Some examples include small firms involved in creative designing and architecture works. Thus, many small businesses have chosen to operate within industrial buildings in suburban areas to benefit from the significantly lower rents of these properties compared to those of office buildings.

The lack of small commercial space to serve this sandwich segment has put the government in a difficult situation, requiring the needs of businesses to be balanced without distorting the market. To bridge the gap between the space offered in the current industrial and office markets, the government could hence consider looking into the feasibility of increasing the supply of suburban office developments – with space features designed for the growing pool of small businesses. The provision of such small suburban offices could hence provide businesses a viable alternative while reinforcing the definitions of space to be used for industrial and commercial uses.

Before a feasible space option becomes available, a “temporary” development levy could meanwhile be imposed on current non-compliant tenants, while providing them the option to remain within their industrial premises. The levy would act as a fee paid by commercial tenants for the enhanced use of industrial space. Although a levy would inevitably lead to higher costs for businesses, commercial tenants within industrial developments are nevertheless given a temporary alternative to operate in while the government avoids the risks of a market imbalance that would result from strict eviction terms.

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

Posted in Industrial Research, Singapore | No Comments »

Will Strong Demand Continue To Be Seen In The Industrial Sector?

Monday, February 25th, 2013

Indonesia is in the spotlight!

Lured by Indonesia’s robust and resilient economy and positive business outlook, many foreign and international companies have flocked to the country to join the band of existing companies, which have enjoyed tremendous growth over the past several years.

This trend has been clearly evidenced by the country’s growing level of Foreign Direct Investment (FDI) during the past three years. According to the Indonesian Investment Coordinating Board (BKPM), FDI steadily grew between 2010 and 2012 by an average of 32% per annum. Last year, Indonesia’s total FDI increased by 36% to approximately USD 24.6 billion (this figure from BKPM does not include investment in the oil & gas, banking, insurance and household industries).

Aside from mining, which has been the most attractive sector (accounting for approximately 17.3% of the total FDI in 2012), most of these new investors have been attracted to sectors that are directly connected to the country’s huge and growing middle class, such as the transportation, telecommunication, logistics, pharmaceuticals and automotive sectors.

With the growth of FDI, the demand for industrial land has also increased significantly during the past three years. Between 2010 and 2012, the net absorption of industrial land in the area of Greater Jakarta averaged around 600 hectares per annum, which is about six times higher than the annual absorption seen during the period between 2000 and 2009.

Consequently, prices of industrial land have also increased. The average industrial land price in the area of Greater Jakarta rose by a CAGR of 50.5% between 2010 and 2012, which is 14 times the CAGR of 3.6% recorded between 2000 and 2009. Currently, the price for industrial land in the area of Greater Jakarta averages at around USD 124 per sqm. Popular estates with good access and infrastructure can fetch as high as USD 150 per sqm to USD 200 per sqm.

While Indonesia has continued to attract foreign companies to relocate or establish their production facilities within the country, there is growing concern over the increasing cost of land that could potentially hamper future market growth. Reportedly, some investors have expressed concerns about the industrial land prices, which are expensive compared to some other countries in the region. Based on anecdotal evidence, the price of acquiring a site for a factory in the area of Greater Jakarta is estimated to be around 10-15% of the total initial investment, while in some other Asian countries, the costs of acquiring land are only about 5% of the initial outlay. As such setting-up a factory in Indonesia may not be as appealing.

With the country’s robust economic growth and strong domestic demand, we believe that investors will continue to be strongly interested in building manufacturing facilities and the demand for industrial land will likely continue to grow in Indonesia.

About the author
Anton Sitorus is the Head of Research for Jones Lang LaSalle in Indonesia.

Posted in Indonesia, Industrial Research | 1 Comment »

The Development Metrics For Sydney Industrial Property

Tuesday, December 18th, 2012

The industrial market development cycle in Australia has come full circle following the Global Financial Crisis (GFC) and post-GFC recovery. We recently analysed the metrics that an institutional developer would adopt in the feasibility analysis for a warehouse and office development in Western Sydney. We identified the four key ‘levers’ in the development model and how they have looked at each stage of the cycle between 2007 and 2012.

In 2007, a developer would have adopted a land rate of around AUD 350 per sqm, cap rate of 7.0%, very low profit target (including compensation for risk) of 5.0% and pre-lease rent of AUD 110 per sqm p.a. net.

In 2009 land rates fell to around AUD 250 per sqm, cap rates eased to 9.0%, profit and risk normalised at around 20% and pre-lease rents remained around AUD 110 per sqm p.a. Clearly in this environment investment hurdles were much higher. While asking rents held up, very few new pre-lease development deals were recorded.

Enter 2012, and the cycle has turned again. An institutional developer now assumes land prices have remained flat at AUD 250 per sqm. Cap rates have tightened: a cautious developer would assume a cap rate of around 8.0% on a 5-7 year term or as low as 7.5% on a 10-15 year term. Profit (including risk) has decreased to less than 10% and is being squeezed further by some developers. Meanwhile, pre-lease asking rents have increased to around AUD 115 to AUD 125 per sqm p.a.

What are the dynamics for development heading into 2013?

The current spread between existing and pre-lease rents in Outer Central Western Sydney is the highest in ten years at AUD 8 per sqm p.a. Pre-lease rents typically carry a positive spread over existing market rents but existing and pre-lease rents general move together over time. However, when the spread between existing and pre-lease rents is narrow or even negative, strong tenant pre-lease activity has often occurred. A construction response from developers then results in some backfill or speculative development vacancy, which can temporarily depress existing market rents.

We are in the latter stage of this cycle.

What happens to rents now will depend on how quickly existing vacancy is absorbed and how responsive developers are in 2013.

A range of lead indicators, such as container traffic and inventory growth, point to rising demand for space in 2013. A number of pre-leases remain in the market. Meanwhile, the forward supply pipeline indicates a significant slowdown in 2013 pointing to low vacancy in core locations.

So which of the four ‘levers’ in the development model will move in 2013?

Land values appear unlikely to be bid up, with limited new developer interest in land currently. Cap rates have room to tighten. Though our base case implies only around 50 basis points of tightening through the cycle, this may occur more rapidly than forecast. Profit and risk has already tightened, with very little room to be squeezed further.

We expect to see prime grade existing market rents increase in 2013 to close the gap on pre-lease rents in a low supply and rising demand environment. This will ignite another mini-cycle of pre-lease activity and a supply response from developers as the rental pulse increases.

About the authorNicholas Crothers the Director of Industrial Research for Jones Lang LaSalle in Australia, based in Sydney.

Posted in Australia, Construction, Industrial Research, Valuation | No Comments »

Emerging Industrial Cluster In India – Ahmedabad, Vadodara And Surat

Tuesday, August 21st, 2012

With 24-hour power supply, Special Investment Regions (SIRs), closely knit all-weather roads and proactive government support, the state of Gujarat has evolved as one of the key industrial investment destinations of India. The proposed Delhi Mumbai Industrial Corridor (DMIC) and Mumbai Ahmedabad Bullet Train projects are expected to fuel this development even further. DMIC connects three prime cities, namely Ahmedabad, Vadodara and Surat, which will form the key growth nodes of an industrial cluster development in the coming years. DMIC will make large tracts of land along the corridor available for industrial and other real estate development purposes in the form of Investment Regions and Industrial Estates. In this blog let me discuss how these cities will eventually cluster together and experience an integrated industrial development.

Ahmedabad, with textile manufacturing as its major industry, is emerging as an automobile-manufacturing hub with the onset of Tata Nano Car (world’s cheapest car) plant and investments by Peugeot, Ford and Maruti Suzuki to start their manufacturing facility. Although most of the development in Ahmedabad is currently focused towards the western part of the city, the major roads NH8 and NE1 will be the emerging growth corridors as they will connect to Mumbai and Vadodara. It is also proposed that the Ahmedabad – Dholera Special Investment Region will be developed along the DMIC. These developments will slowly merge with Vadodara to form the second node of the cluster.

Vadodara’s economy is driven by the chemicals, petrochemicals, pharmaceuticals and biotechnology industries. The NE1 or Ahmedabad – Vadodara Expressway in the north of Vadodara has reduced the travel time from Ahmedabad to one hour. Moreover another expressway is proposed from Vadodara to Mumbai. These will drastically improve the connectivity of Vadodara with these cities and surge the development of Vadodara. Biotechnology and petrochemicals sectors will be the sectors to invest in Vadodara in future. The Ajmer Road on the east of Vadodara connects to Surat, which is the third node of the cluster. Surat is the world’s diamond city with more than 90% of the world’s diamonds cut and polished there. It has been proposed that the Surat Navasari Industrial Area be developed along the DMIC which will pass through eastern Surat. The developments along these road networks will eventually merge these two cities.

Urbanisation along the DMIC will merge these three cities into an important industrial cluster. This cluster is expected to attract large investments due to the business-friendly environment created by the DMIC with support from the state government. The industrial development will cascade other real estate developments such as integrated townships. Moreover, improved connectivity will allow easy access to the manpower and land needed for industrial setups. Overall this cluster is expected to emerge as a prime industrial cluster of Gujarat and India due to its excellent infrastructure and good governance. JLL has already started operations in Ahmedabad assured by these promising developments and I am sure we will make our contribution towards development of Gujarat while growing by leaps and bounds in that state.

About the author
Trivita Roy is the Senior Manager of Research and Real Estate Intelligence Service, for Jones Lang LaSalle in India, based in Hyderabad.

Posted in India, Industrial Research, Urbanisation | No Comments »

Pune’s Changing Industrial Landscape And Its Impact On Real Estate

Wednesday, June 13th, 2012

Would anybody have ever imagined that a place known for its soothing weather, tranquility and as being the cultural capital of India would also become known for its large contribution to India’s growth story? Perhaps not. Although industrial development dates back to the 1960s when mechanical engineering units set up their bases in and around Pune, the economy didn’t really begin to open up until the early ‘90s with the advent of LPG policies (Liberalisation, Privatisation, and Globalisation). When this was coupled with the availability of a humongous pool of energetic and talented employees supplied by the various local educational institutes the city grew at a rapid pace. What makes Pune so attractive and popular is its blend of cosmopolitan culture, good weather, proximity to the business capital, and its slower and quieter pace. The city has also gained popularity as a second-home or weekend-home for industrial tycoons and celebrities as it is not too far away from Mumbai to be inconvenient. As one of the three vertices of the GOLDEN TRIANGLE PROJECT Pune has witnessed an enormous influx of investment and new industries and the creation of huge numbers of jobs across all sectors. This has helped the city establish itself on the map as one of the most preferred locations in India for many giant international companies.

Industrial development has been the major economic driver for Pune for a long time, and over the recent years several companies from other sectors have established themselves in the city so that it is now also known for IT / ITeS, pharmaceutical and biotechnology businesses.

The year of global turmoil, 2009, saw a steep spike in operational costs in many countries and it made sense for companies to invest in places where labour costs were lower. This led to the emergence in Pune of new industries with the city attracting automobile giants such as Volkswagen and General Motors which both established manufacturing units in the Chakan area.

Once the LPG policy came into effect, a number of local as well as MNCs set out to attract the best talent they could find by offering handsome salaries and remuneration and this sudden spurt in income and improved lifestyle caused the recipients to look around for investment vehicles. One of the most lucrative of these for the last decade has been real estate, both commercial and residential. The emergence of the industrial sector in the city has increased real estate activity in the city, particularly in the fringe areas, but the majority of the developments there target middle-income earners.

As we all know, there is a direct correlation between industrial development and real estate growth and hence areas such as Pimpri-Chinchwad, Talegaon and the Chakan belt, Sanaswadi, Pirangut, Shirwal and Ranjangaon, where a variety of goods such as commercial vehicles, locomotives, electronic consumer durables, pharmaceuticals and a number of intermediate goods, are manufactured and assembled have seen unprecedented real estate development. Other factors have been a stable real estate market and realistic prices.

What we have seen in terms of growth and development is just a tip of the iceberg, promising more than what it has offered until now. Also, real estate growth needs to be supported by local, state-level and central government policies along with a huge investment in infrastructure. Hence, it is pertinent to mention the last stanza of a poem by Robert Frost titled “Stopping by Woods on a Snowy Evening” which I like very much.

The woods are lovely, dark and deep
But I have promises to keep
And miles to go before I sleep,
And miles to go before I sleep.

About the author
Alok Jha is the Assistant Manager for Jones Lang LaSalle in India, based in Pune.

Posted in India, Industrial Research | No Comments »

Restructuring In The Australian Industrial Investment Market

Friday, March 2nd, 2012

Over the past few years there has been significant consolidation in the Australian industrial market. At least five major domestic players, which had been active purchasers of industrial property prior to the Global Financial Crisis (GFC), have since made strategic decisions to exit the sector. This has presented opportunities for the remaining domestic participants as well as new entrants to the sector. Since emerging from the GFC one major listed fund has been taken over and a number of large portfolio transactions have occurred, though there have been relatively few individual asset purchases by Australian institutions. Instead, many of the remaining major domestic players focused on developing their existing land banks and growing their development earnings.

This rationalisation in the sector also opened a window of opportunity to foreign investors. In 2010 and 2011 two offshore investors, GIC and Aviva, each made significant investments into the Australian industrial direct property market via portfolio acquisitions and joint-venture arrangements. Prior to 2010 the Australian industrial market had become highly institutionalised and ownership on a large scale had remained almost exclusively domestic.

We expect that Australian industrial property will continue to attract offshore capital for a range of reasons. Some of the appealing features of the sector include high yields relative to the office and retail sectors (+80 basis point spread to both sectors on national average basis for prime stock), and the high quality tenants and long lease terms available for newer stock. The issue for offshore groups has been, and will continue to be, the availability of stock that meets these requirements and their ability to build portfolio scale to meet their investment targets. It should be noted that the inflow of offshore capital is not a trend limited to industrial property. Australia has been attracting foreign buyers in the office and retail investment markets since 2007. However the industrial sector has now emerged as a target for offshore investors.

The fundamentals point to a continuation of relatively strong investment returns. A low supply pipeline and healthy levels of take-up imply a positive outlook for rental growth. Yields remain elevated relative to the risk-free rate and have some capacity for further moderate compression over coming years. We are currently forecasting that prime industrial assets will outperform the other sectors over the next three years, returning an average of 13% p.a. on a national basis. If we are right, the sector will continue to attract buyers who assess investments on a total return basis. Examples are domestic wholesale funds and offshore groups, both of whom were active purchasers in 2011. We believe the industrial investment market is set to have another solid year.

About the author
Andrew Quillfeldt is the Research Forecasting Analyst in Jones Lang LaSalle Australia, based in Sydney.

Posted in Australia, Forecasting, Industrial Research, Investment Research | No Comments »

Perth’s Industrial Shortfall

Monday, February 20th, 2012

In the past 6 months the pipeline of industrial projects in the Perth market has shrunk as a number of major developments completed and only a few smaller developments have commenced.

Currently 57,700 sqm of industrial space is under construction in Perth, which is all due to complete in 2012. There is an additional 17,200 sqm approved which is expected to complete before year end. Our forecasts indicate that there will be 74,900 sqm of completions this year, down 36% from the 116,600 sqm recorded in 2011. The ten year average is 123,900 sqm.

Development at the moment is almost entirely pre-commitment driven. 88% of the space under construction is committed. In the past year we have also witnessed the emergence of more owner occupiers, who have paid high rates for sites in Welshpool and Belmont.

Demand has been very strong, and a number of major leasing deals that have completed so far in 2012 suggest this is unlikely to slow. Gross take up of 217,200 sqm was recorded in 2011, which is 58% above the 10 year average of 137,300 sqm.

Transport and logistics groups are leading demand and most are looking for large facilities in core suburbs. This has seen vacancies in the Perth industrial market fall dramatically and there are only a handful of warehouses larger than 5,000 sqm available for lease.

Lack of large industrial land holdings is an issue for Perth. Values for small lots have been mostly stable over the past 12 months, but one hectare lots have seen values increase by 10.4%.

Developers who have large land holdings have been able to secure design and construct tenants at high rental rates. The Jandakot Airport Development, Ascot Capital’s new venture, has driven pre-lease rents in the South, which have grown by 18.0% in the last 12 months.

The Jandakot Airport Industrial Estate has been one of the few options for large tenants. Jandakot was once considered a secondary location in the Perth industrial market, but the lack of opportunities has seen the precinct become the most active development centre in Perth. Jandakot Airport accounted for 40% of the space developed in 2011, and has attracted global tenants such as General Electric and Halliburton.

The long term solution to the land shortage appears to be Latitude 32 in Hope Valley, a 1,400 hectare development 25 km south of Perth. The first stage will include 45 industrial lots in two precincts. The development has attracted owner occupiers Southern Steel and ATCO, but at this stage lacks the infrastructure to be an option for transport and logistics groups.

There are plans for a new port and an intermodal facility in Kwinana, but the state government has indicated that the port is unlikely to be built until after 2020.

With very few vacancies and a shortage of development sites, industrial tenants will have difficulty finding large facilities in the short to medium term.

About the author
Hugh Peacock is a Research Analyst for Jones Lang LaSalle, based in Perth, Australia.

Posted in Australia, Industrial Research | No Comments »

Industrial Revitalisation Has No Big Impact On The Grade A Market

Tuesday, January 31st, 2012

In its 2009-10 Policy Address the government announced an array of new policy measures aimed at optimizing the use of older industrial buildings in the city whilst also addressing the shortage of commercial space in core districts. Among these new policy measures, was the facility for owners to apply for nil waiver fee for change in use of older industrial buildings. As of end-2011, 15 applications had been approved with nine applications (total GFA of about 600,000 sq ft) targeting to office use.

For landlords of industrial buildings, the new measure has provided an opportunity to enhance their asset at relatively lower cost. Currently, the rental value of office-use premises can be 50-70% more than that of industrial-use premises with similar specifications in the same district. Office tenants can also benefit from the new measure because users in revitalised industrial buildings can occupy premises as offices legally and with less restrictions compared with industrial or industrial/office users. Moreover, the rental level of offices in revitalised industrial buildings is only around HKD 8-10 per sq ft, which is only 30% of Grade A office rents or 50% of Grade B office rents, in a similar location. As such, revitalised industrial buildings can be seen as a feasible option for more cost-conscious tenants who want to further reduce their operating expenses without trading off substantially on accommodation quality.

However, I do not see the wholesale conversion (change of use) of older industrial buildings creating much pressure on the Grade A office market. At least, we have yet to observe any notable movement of tenants from the Grade A office market into revitalised industrial buildings. Demand for offices in revitalised industrial buildings has so far been largely restricted to those relocating from industrial buildings nearby. So what is holding back more notable tenants from relocating into this seemingly more cost effective office space? Building specification is one of the major reasons. Although industrial buildings need to conform to an array of technical criteria such as fire safety and lift service systems before they can be subject to wholesale conversion, the revitalised buildings merely remain modernised industrial buildings and are not intended to be direct substitutes for Grade A offices. In reality, not all Grade A occupiers can accept such a down-grade in accommodation quality, as the difference in the quality of office space between industrial buildings and those that have undergone wholesale conversion is generally distinguishable.

In addition, in terms of future supply, there are currently only 50 cases pending approval. Compared with the estimated 1,200 industrial buildings that meet candidate criteria within the territory, the pipeline for revitalised industrial buildings is relatively thin. Most of these premises are small in scale with floor plate sizes typically less than 10,000 sq ft. These are not the typical sizes sought by traditional Grade A office tenants.

In short, while revitalised space may be an option for tenants seeking lower rents, it is not expected to have any significant impact on demand in the Grade A office market.

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

Posted in Hong Kong, Industrial Research | No Comments »