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February 28, 2017

With faster technological changes, there is always the risk of buildings becoming obsolete. Current trends such as retail-tainment, green buildings, modern logistics and growing urbanisation spell further changes in the way space and buildings are developed and used. As a result, real estate investors may need to re-evaluate current and future investment opportunities.

Myles Huang from JLL’s Capital Markets Research team in Asia Pacific tells us what investors should expect from the rapidly changing environment.

Chart one highlights the risk of obsolescence and shows the average age of the most expensive office space in ten gateway cities in Asia Pacific.

“We see that China has the newest office stock as a result of the recent construction boom; in Singapore, 25 percent of the current Grade A space in the Central Business District has been built since 2010. At the opposite end of the spectrum, core prime buildings in Hong Kong and Melbourne are more than 20 years old, meaning that many of them were built before the digital age –  and are risk of being technologically obsolete,” Huang explains.


Chart one. Source JLL, 2017.

Data-driven real estate investment

With a lengthy list of technologies that may potentially impact real estate, the key question for the industry is: how does this explosion in data change the way tenants, buildings, leases, portfolios, and even districts and cities, are understood and measured in terms of performance?

“Take UberPool. From a real estate point of view, the UberPool model shifts pricing preference for location decisions. Now, it is easier to get to suburban office locations, and it is no longer necessary to funnel workers to city centres,” says Huang.

‘Another example is the Geographic Information System (GIS) making it easier for occupiers and investors to analyse and visualise data in order to make the right site selection choices. Analysis that can be performed include lease/sale comparisons, competition density, demographics and drive-time/transit-time. We believe that these new technologies could potentially change our assumptions about the favourable characteristics of an investible asset.”

Higher rents for smart buildings

In the future, new buildings will have to offer more than just location and connectivity to amenities. The next generation of buildings is set to become a lot smarter, thanks to data availability, sensor technology and breakthroughs in building material.

Huang says that Asia Pacific is doing well on this front with most smart buildings in the region usually built as green buildings, with innovative design and technology to help save on energy costs.

“New smart buildings in Shanghai and Singapore already fetch the highest rents in their respective cities,” he says.

“That said, prime commercial buildings today are still primarily defined by locations. For example, Hong Kong rents continue to outstrip its peers by a wide margin even though we have shown its buildings to be the oldest in the region. Going forward, however, smart buildings will be able to attract the biggest corporate organisations who are willing to pay higher rents, in return for business efficiency, happier and more productive employees, and for being considered “green”. In fact, some banks have adopted a policy of moving their new offices to Leadership in Enegry and Environmental Design (LEED) rated buildings. A good example of this is Citi, commonly known as one of the “greenest” banks in the world, have adopted a policy of always moving their new offices to LEED rated buildings.”

Global investors choose digital cities

Besides favouring smart buildings, chart two shows that capital moves towards cities with the best connectivity.

“On the vertical axis, cities are ranked by JLL’s City Investment Intensity Index, which adjusts the volume of direct real estate investment of a city (over a three-year period) by its current economic size. It’s evident that, within the Asia Pacific region, the cities that attract the most real estate investment relative to their size are Sydney and Auckland. On the horizontal axis, cities are ranked in terms of connectivity using the technology component of the IESE Cities in Motion Index – which attempts to measure how “smart” is a city based on a range of indicators such as broadband users, IP addresses, WiFi hotspots, Facebook users, mobile users etc.”

Chart two. Source, JLL’s Investment Intensity Index, IESE Cities in Motion Index 2016.

The 2016 Index show Asia Pacific cities at the forefront of connectivity globally. Out of 181 cities, Tokyo and Seoul are in first and second places respectively, while Sydney (in seventh spot) and Hong Kong (ranked tenth) are among the global top 10 along with New York City, London and Amsterdam.

“A high positive correlation coefficient between the two set of rankings suggests that connectivity is a major consideration for investors, and we see great scope for Asia Pacific markets such as China to move along the line as investment intensity improves alongside connectivity,” says Huang.

A change in mindset for investors

As technology advances, investors to change their mindset as to how they approach real estate.

Huang believes it’s imperative for investors to keep pace by understanding how key trends such as the use of data and analytics feed into investment and portfolio analysis, how smart city concepts could change city hierarchies, as well as consider the need for and the potential of redevelopment.

 

Myles Huang
Capital Markets - JLL

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