To readers who are not familiar with this housing scheme in Singapore, ECs were introduced by the government to fill the price gap between public housing developments and private condominiums. Built by private developers on land sold through government land sales, ECs offer furnishing and facilities similar to those typically found in private condominiums. However, buyers are bound by certain restrictions set by the government, such as a combined monthly income of the qualified family unit not exceeding SGD 12,000 and a minimum occupation period (MOP) of 10 years before the development can be sold directly to locals and foreigners on the private market without any restrictions being placed on the new buyers. EC owners can sell their properties to only Singaporeans and permanent residents (PRs) after fulfilling a shorter five-year MOP. The hybrid public-private ECs thus prove largely popular among middle income couples or upgraders from public housing developments, who find the prices of private condominiums prohibitive.

Given these restrictions, ECs are typically priced at a discount to nearby private condominiums. In recent months, the prices of new ECs have, however, reached new highs, mirroring the price trend of private condominiums. Despite the record prices, new ECs still see strong demand, with units oversubscribed at launch. This is likely attributed to buyers comparing ECs to private condominiums, with the expectation that ECs after 10 years could see an upside in value when the project is fully privatised. The motivation for developers to outbid one another for the lucrative plot of land also results in higher land costs being factored into the selling prices.

As the government mulls over revising current policies behind the EC scheme, policymakers could, for a start, consider phasing out the subsidies offered to EC purchasers. Such subsidies are currently offered to a higher income group to aid the purchase of ECs, while some amongst the lower income group – which has to largely settle for public housing developments – receive lesser subsidies, creating an inequity that distorts the distribution of wealth.

Beyond the upfront subsidies, the quasi-public-private nature of ECs also creates another latent subsidy, as properties are purchased at a discount to comparable private condominiums, allowing potential price appreciation after the MOP. The government should hence re-evaluate whether future ECs should instead be retained as another type of public housing, with the pricing determined by the government and any resale restricted to locals who have to fulfil the MOP requirement. In addition to enabling the healthy recycling of this premium public housing development among locals, this shift would also clearly delineate the market demand that is to be met by the public and private sectors accordingly.

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

Correlating these responses with the acceleration of CRE outsourcing, we see that CRE executives fare better in mature countries such as the US, while in less mature ones the perceived ability to rise to the challenge is more limited. This is particularly true in Asia Pacific, where only 21% feel well-equipped region-wide and none at all in Japan.

Source: Jones Lang LaSalle, Risks Ahead- Global Corporate Real Estate Trends, 2013

Pressures resulting from this lack of confidence are not likely to subside. The spotlight shone on CRE two years ago as the result of the global financial crisis has only gotten brighter. Greater engagement with the C-suite and closer alignment between business and CRE strategy have led to an uncomfortably broad range of demands being placed on CRE professionals. Not only do CRE executives need to continue to deliver tactically, but an expanded set of more strategic demands are building up.

At the tactical level, reducing costs remains at the top of the traditional demands that have been in play with CRE teams for some time. At the strategic level, delivering productivity outcomes is consistently cited as the most crucial. While workplace productivity improvement was featured in our 2011 report as an emerging trend for best-in-class workplace strategy, it is now reported as a high expectation by senior leadership. This primary focus is also taking CRE beyond the workplace to encompass people, business and asset productivity.

Strategic requirements are coming as an addition to – not in replacement of – previous demands. They are calling for different skill sets and represent a drain on capacity. If combined with frequently low investment in the CRE function, mounting C-suite expectations increase the risk of CRE teams underperforming. Step change is needed for CRE to fully deliver to its elevated agenda. Read other survey findings in Jones Lang LaSalle’s report Risks Ahead! Global Corporate Real Estate Trends.

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

In my childhood days, the general election (known locally as “pemilu”) was a month-long “celebration of democracy” merely to show force amongst the contestants, and involved mass gatherings and rallies that often ended up in public clashes, yet from the beginning we all had actually known who was going to be the winner! But that was the story during President Suharto’s 31 years in office. After he stepped down in 1998, Indonesia entered a new era, and for the first time in history, the country hosted a true democratic election in 2004 and again in 2009. Both concluded peacefully and successfully, raising the profile of Indonesia as one of the largest democratic countries in the southern hemisphere.

Now the country is preparing to conduct the third general election since the so-called reformation era. Unlike the elections during the Suharto era, this time no one knows which party is going to emerge as the ruling party let alone the future president. For a developing country and young democratic nation like Indonesia, this is critical because the country’s leadership plays an important role in the economic as well as the socio-political arenas. The future may seem a bit shadowy.

While we expect some slowdown in business activity as companies hold back their expansion plans, the economy and general business activity is likely to continue on a positive trajectory. The latest GDP data shows that the economy was down marginally to 6.0% y-o-y in 1Q13 despite the subdued global economy and a heightened level of uncertainty prior to the election in 2014. This affirms the resilience of the domestic economy that is entering its third consecutive year of 6-7% growth per annum.

Indonesia’s strong domestically driven economy continues to attract new investments in various business sectors, including real estate. We continue to receive many enquiries from foreign developers, fund and asset managers as well as construction companies. At the same time, many local players are aggressively expanding their projects throughout the country, not only in Tier I cities but also in Tier II and smaller cities. This is all despite the fact that the country is going to hold a general election next year. In short, our view is that the negative impact that may occur as a result of the uncertainty surrounding the election will be limited. Both local and foreign companies and investors are mostly optimistic regarding Indonesia’s economic outlook. This week, Galeries Lafayette, an upscale department store from France, opened its first store in Jakarta. This example illustrates the level of confidence that international investors have towards Indonesia’s long-term prospects.

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

Most Active Cities for Investment in Q1 2013

At first glance, the flood of international capital into Shanghai seems to come at a strange time. Pessimism about China’s economy became more widespread in recent months after disappointing economic performance in the first quarter. A slowdown in expansion by international businesses has caused rental growth in Shanghai’s office and retail markets to slow, and rising residential prices, disappointing consumption levels and weakening retail sales growth all provided fodder for China bears.

It therefore may seem counterintuitive that some of the largest and most respected global investors are increasingly favouring Shanghai as a destination for capital. Several of the leading global private equity firms have recently made large purchases in Shanghai. Both Blackstone and Carlyle, for example, purchased office properties in the Shanghai CBD in the past two quarters. So why are these players so optimistic about the medium-to-long term prospects for Shanghai?

My hunch is that most of these investors have looked beyond the short term negativity caused by a slowdown in the pace of China’s growth and are concentrating on the big picture. Right now, they have the opportunity to purchase property in the financial and economic centre of what is by far the fastest growing large economy in the world. Even if China’s economy slows from 8% growth to 7% growth in the next few years, 7% growth still beats prospects in Europe and North America by a wide margin. On top of that, prime office yields are higher in Shanghai than in New York, London, Tokyo, Paris, and Hong Kong, meaning investors in office assets, Shanghai’s most popular sector, can lock in strong returns while also capitalising on future growth prospects. Despite negative headlines about the state of China’s economy, the upside potential here will continue to drive increasing investment in real estate assets.

About the author
Daniel Odette is a Senior Analyst in Jones Lang LaSalle’s research team in China, based in Shanghai.

Falling demand from two key occupier groups – the public sector and the mining sector – caused the rapid market downturn. A newly elected state government initiated public sector downsizing in the order of around 14,000 full time positions. With the government previously occupying roughly 20% of all stock in the CBD, contraction in the government footprint by around a quarter is having a severe impact on the market. This is expected to continue in the short term.

Demand was also weakened by significant consolidation among resource sector tenants. As the peak of the investment phase of Australia’s mining boom nears, firms are focusing on cost containment, with real estate a non-core area where costs can be minimised. Coal mining firms in particular have been quick to cut costs given lower commodity prices and slowing demand. During Q1/2013, Rio Tinto and Xstrata Coal both relinquished a significant amount of space in the Brisbane CBD.

Surprisingly, despite the tougher leasing conditions, both the development and investment markets have remained relatively solid. Investment capital is still firmly focused on prime assets and two new large developments (480 Queen Street and 180 Ann Street) are likely to commence construction imminently. Along with the falling cost of debt and relatively high cap rates, a key to understanding this apparently contradictory dynamic is recognising the two-tiered nature of the market.

Government and mining sector tenants primarily withdrew from secondary space. Consequently, as the chart below shows, the secondary vacancy rate increased to 16.6% over the quarter and is now double the prime rate (8.3%). While overall demand conditions worsened, the prime end held up relatively well, illustrated by several large leasing mandates currently in the market. These leasing requirements, coupled with limited availability of prime contiguous space, have given developers confidence to proceed with existing schemes in spite of the higher overall vacancy, with the 58,000 sqm 180 Ann Street project completely speculative and the 55,000 sqm 480 Queen Street development 50% leased.

The stability at the prime end has also underpinned solid investment activity, with sustained capital focus on high quality real estate. Assets with long WALEs, strong lease covenants, and small capex requirements are key acquisition targets for the many institutional funds currently in the market, supporting prime yield compression of 25 basis points at the upper end of the range in Q1/2013. While we expect the prime end of the market to continue to hold up relatively well, a key question is what will become of secondary stock, particularly given the now higher pace of obsolescence?

About the author
Peter Guevarra is a Market Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.

For the city’s Grade A office market, the latest figures largely correlate with what we have seen on the ground through the early part of the year. Demand, which has been driven largely by cost-saving relocations over the past 12-15 months, has more recently started to show signs of strengthening. While the top-end of the rental market remains weak, demand in the mid and lower ends of the market has been supported by a moderate pick-up in the number of tenants willing to pay a slight rental premium to secure appropriate office space, both for expansion and upgrading purposes.

This modest pick-up in demand and market sentiment led to rents in the Central office market edging up in April for the first time since May 2012. Whether the market has merely reached an inflection point or the beginnings of a broad based recovery remains to be seen but if the results of the government’s latest Quarterly Business Tendency Survey is anything to go by, the near term outlook for the market remains positive, with overall business sentiment of larger business enterprises showing improvement over the previous quarter.

Looking ahead, Hong Kong’s economy remains on track to post growth in the range of 3-4% in 2013, as forecasted by private economists. Any upside in the economy, however, is unlikely given the on-going concerns in Europe and the sequestration-induced ‘pause’ in the US recovery.

Taking into account the performance of the office market through the early part of 2013 and outlook for the economy, we believe that the Grade A office market is still likely to bottom out sometime in 2013. Any recovery, however, is likely to be weak in view of the modest growth expectations for the local economy.

About the author
Denis Ma is the Local Director for Jones Lang LaSalle in Greater Pearl River Delta, based in Hong Kong.

The Philippines posted impressive GDP growth of 6.6% in 2012 and is expected to post a continued growth streak in 1Q13, as two of the pillars of economic growth — remittances from overseas Filipinos and tourist arrivals — posted strong growth in the first few months of the year. Remittances from overseas Filipinos grew by 6% y-o-y to USD 1.682 billion in February 2013 from USD 1.587 billion in the same period in 2012. Tourist arrivals for the first three months of 2013 reached 1.27 million, a growth of 10.76% from the 1.15 million tourist arrivals during the same period in 2012.

Just last week, the Philippines achieved its second investment rating upgrade from Standard & Poors, the result of continuing improvement in the economy, manifested in stable consumer prices, a better fiscal position and a strong external balance sheet. This came after the investment rating upgrade by Fitch Ratings in late March 2013, which highlighted the resilience of the economy amidst a weak global economy, improvements in fiscal management and a strong policy-making framework.

These investment rating upgrades are expected to improve the flow of investment into the Philippines in the medium- to long-term. One of the sectors of the economy that could clearly benefit from the potential surge in investments is the real estate sector. The investment rating upgrade could potentially boost the confidence of investors in various property products and investments because of stable market conditions and property yields.

While the potential increase in the level of investments in the property sector will also likely increase the level of risk due to speculative foreign investors, the government, through the Bangko Sentral ng Pilipinas (BSP), has implemented new measures to ward off short-term investments and speculators in the property sector. The BSP is set to refine its existing regulations to include stricter provisions to limit the loans extended by banks to the property sector, including housing loans granted to individuals, credits extended to property developers and holdings of securities issued by real estate firms.

These two coinciding events — improvement in the investment rating and the local and midterm local elections — show the level of maturity of some of the country’s institutions. As the relevant institutions continuously adapt to the highly dynamic economy, the fruits of the investment rating upgrades and the credible results of the election will project even stronger confidence in the market.

About the author
Claro Cordero Jr is the Head of Research, Consulting & Valuation Advisory Services for Jones Lang LaSalle in the Philippines.

Since the global financial crisis, Woolworths and Wesfarmers have had to develop their own neighbourhood shopping centres and freestanding hardware store warehouses in order to facilitate the expansion of their store networks because there has been a low level of participation by private developers. Private developers have been deterred for feasibility reasons, specialty store leasing challenges and a general low risk appetite, but the retailers have been able to undertake developments at cost or on low margins. As a result, both groups have accumulated substantial property holdings through development and have been undertaking a number of major sale and leaseback transactions.

In 2011, Woolworths sold a portfolio of eight shopping centres to a joint venture between Charter Hall and Telstra Super for AUD 266 million. Then in 2012, Woolworths also completed an initial public offering of a new A-REIT called Shopping Centres Australasia (SCA Property Group) comprising 69 centres that were valued at AUD 1.406 billion.

Bunnings (the hardware store subsidiary of Wesfarmers) sold a portfolio of hardware store warehouses to BWP Trust for AUD 241.71 million in 2011 and a portfolio for AUD 206.7 million to Charter Hall and Telstra Super in 2012. In May 2013, on behalf of Coles (the supermarket subsidiary of Wesfarmers), Jones Lang LaSalle sold a 75% share in a AUD 532 million portfolio comprising 19 shopping centres to ISPT (an Australian superannuation fund). Wesfarmers will retain a 25% share in the portfolio plus management and development rights over the centres. The joint venture also allows for future properties to be acquired as opportunities arise.

Between these five major transactions, a total of AUD 2.52 billion worth of retail assets have been transferred from the balance sheets of these two retailers into the hands of institutional investors. By releasing a large portion of their property holdings, they have been able to unlock capital that can then be re-invested into more productive ventures within their core businesses and fund future store expansion programs.

These recent transactions show there are clearly various structures and options available for retailers looking to sell down real estate holdings and there are a number of other major retail groups reviewing their options. Further, demand from large passive institutional investors continues to strengthen and is making the case even more compelling for retailers to undertake sale and lease back transactions to potentially capitalise on the liquid capital market conditions.

About the author
Andrew Quillfeldt is a Manager and National Retail Analyst in Jones Lang LaSalle Australia, based in Sydney.

Following the announcement from the Central Government, many city governments waited until the end of March to reveal their local implementation details. However, most of them failed to address some of the key issues, and Hainan Province even refused to implement the new measures. At the time of writing this article, only the Beijing city government had enforced the implementation of a 20% capital gains tax, while the governments of cities like Shanghai and Guangzhou have not given an explicit timetable for implementation.

It has long been our view that there are sufficient government policies in place in China to help stabilise the market. It is the lack of enforcement and strict implementation of those policies that has led to the problem of prices rising too quickly. A good example is the HPRs, which were introduced in over 20 cities in 2011 but got gradually loosened throughout 2012. Local governments at the city level have been very reluctant to enforce national policies as their revenues have a heavy dependence on the real estate industry, with land sales being a key revenue source.

Sales volume across the major cities started trending downward in April. We believe this will result in a stabilisation in prices over the next few months if sales remain subdued. However, this volume slowdown is due to a spike in activity before the local governments made their announcements at the end of March rather than because enforcement and implementation are more strict. Over the past two years, the market has been driven primarily by first-time homebuyers and upgraders, who are the participants the government should and will continue to support. Investors and speculators can be kept out of the market as long as the existing measures are enforced and implemented strictly at the local level. An additional policy we think is needed for the long-term sustainability of the sector is the property tax, which would help rationalise purchase incentives and create a steady revenue stream for local governments, reducing their reliance on land sales.

About the author
Joe Zhou is the Head of Research for Jones Lang LaSalle in Shanghai.

Since 2000 the New South Wales Government has decentralised a majority of its departments to Western Sydney, with Parramatta CBD the prime location to service the Western Sydney area. Government Administration and Defence Industry categories make up 49% of total take up followed by Finance and Insurance companies who make up 25% of total take up since 2008.

With the projected increase in population and workforce in the Western Sydney region there are currently congestion issues within the Parramatta CBD, where eight strategic roads converge. To address these problems there are currently two infrastructure projects under consideration: the Western Sydney Regional Ring Road and Western Sydney Light Rail Network to connect to nearby suburbs where the current heavy rail network does not service.

Parramatta Council is a significant player in the future development pipeline as it owns large tracts of land in the central CBD area suitable for development. The council intends to develop a mix of residential, public and commercial spaces in the next 5 to 10 years. Currently there are no significant developments (≥ 5,000 sqm) under construction, however, 134,100 sqm of commercial space is planned to be developed in the next 5-10 years including Parramatta Square.

Parramatta has an overall vacancy rate of 8.4%, however this market has the lowest A-Grade vacancy rate of all monitored markets in Australia at 1.8%. As a result Parramatta is currently unable to attract tenants seeking desirable A-Grade office with large enough floor plates to accommodate their needs.

Across the Sydney markets, Parramatta has the fourth lowest average prime effective rents (AUD 306 per sqm p.a.). However there is competition from comparable suburban office markets (Macquarie Park, Homebush/Rhodes, South Sydney) with closer proximity to the Sydney CBD and with available vacancy with floor plate sizes that prospective tenants desire. Therefore the combination of available green space with large efficient floor plates, lower effective rents and proximity to the CBD may lead tenants to choose other suburban precincts to meet their space needs. Future development depends in part upon infrastructure investment to turn Parramatta’s location at the geographical centre of Sydney into a positive for employment growth. In the next few decades, with significant development of modern office space and imaginative planning, Parramatta has the potential to become Sydney’s second CBD market.

About the author
Leighton Waugh is a Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.