Offshore: More investment deals ahead

Alastair Hughes, Jones Lang LaSalle’s CEO for Asia-Pacific, describes his first year in Singapore as “a bit of a baptism of fire”. He relocated from London, where he was  JLL’s CEO for Europe, Middle East and Africa for five years, and prior to that, managing director for JLL in UK. By the time he moved to Singapore, the European markets were already in a downturn as a result of the global financial crisis.

Hence, Hughes had at least a 12-month head start navigating a tough property environment before assuming the pilot seat here. But, nothing prepared him for the nail-biting ride in Asia’s property markets. “In 1Q2009 — my first quarter here — rental rates in Hong Kong and Singapore fell faster than they ever had in recent history,” recalls Hughes. “Exports were down. Stock markets were down. And, the rest of the Asian markets were a bit wobbly. I thought I had done something wrong.”

The 44-year-old Scot and father of two girls clocked countless air-miles in the first nine months of last year travelling to over 20 cities across the region to get an update on the various markets. “We were helping our clients during the period of distress, and at the same time, I was charging around Asia-Pacific, from Brisbane to Beijing,” he says.

By 2H2009, the doomsday scenario in January had been replaced by more bullish projections. “Since then, things have stabilised — the stock markets have generally moved up and residential markets for most parts of Asia have also recovered,” says Hughes. “Usually, it takes a while for confidence in the economy, which is reflected in the stock market and the housing market, to move to commercial property.”

Despite a tough year for real-estate-investment markets around the world, JLL has managed to grow its market share in the region, says Hughes. For the whole of 2009, the Chicago-headquartered international property consulting firm is believed to have closed over 290 investment deals across Asia-Pacific worth about US$7 billion (RM24 billion). “We know the [pie] has shrunk, but we know that our overall revenue grew,” says Hughes. “And, that could only mean that we have taken more of the [pie].”
Pacific Centurt Place, a 32-storey prime office building in central Tokyo, was sold for RM5.22 billion in a deal considered to be one of the world's largest last year
Deals, deals and more deals
The property consulting firm had brokered a number of headline-making deals in the region, many of which were done towards the tail end of 2009. The most significant transaction was the acquisition of the 32-storey prime office building Pacific Century Place in central Tokyo by Japan’s leading property fund manager Secured Capital Japan Co in December. Estimated to be around ¥140 billion (RM5.22 billion), this is the largest real-estate deal in Japan “and possibly one of the largest in the world in 2009 since the global financial crisis started”, says Hughes. JLL was the asset adviser for Secured Capital.

The seller of Pacific Century Place was said to be Shinsei Bank, which had taken control of the building last September from Tokyo-based Japanese real-estate-fund operator KK daVinci Holdings after the latter defaulted on its loan payments. KK daVinci had acquired the building for US$1.7 billion in 2006 from Richard Li, son of Hong Kong billionaire Li Ka-shing at a time when there was fierce competition for Grade A investment quality assets.

“In Australia, we were involved in one of the largest investment sales of this decade,” says Hughes, referring to the deal for the RBS [email protected] Place in Sydney for an estimated A$685 million (RM2.1 billion) in November. “That’s a classic example of us matching up money from around the world,” he adds. The buyer of the landmark office building was South Korea’s National Pension Fund, while the seller was Commonwealth Property Investment Trust, which is managed by Australia’s Colonial First State Property Ltd.

Last September, JLL was the adviser to Merrill Lynch in its divestment of three Hong Kong retail malls to a mainland Chinese fund for HK$1.6 billion (RM670 million). Nearly 20 entities had bid for the portfolio, and the deal was considered to be one of the largest transactions in Hong Kong last year. “It was an international seller, with a private Asian buyer,” says Hughes.

Meanwhile, in Singapore, JLL was the marketing agent representing HDB, which sold Clementi Mall in a tender in November.

There were six bidders, with the top bid of S$541.9 million submitted by a consortium led by Singapore Press Holdings. “That was the biggest investment transaction in Singapore last year,” notes Hughes. It was also regarded as a record figure paid for a suburban mall in Singapore.

According to JLL Research, total investment sales in Singapore was S$8.5 billion last year, a contraction of 49.7% from 2008, which saw close to S$17 billion in deals done (see table). The residential sector accounted for S$4.6 billion, or more than 53%, of the transactions closed in 2009.

Hughes anticipates that investment activity in dollar terms around the region will pick up by 30% to 50% in 2010 from the previous year. He explains that this is due to the sheer amount of real-estate transactions done in 2007, which he regards as “the high point”. Many of these deals were funded with huge amounts of short-term borrowings for a three-year period.

“That means there’s more debt expiring in 2010,” says Hughes. “In some cases, that will trigger investment activity — either the bank will ask the buyer to sell the property to get the money back, or the buyer will not be able to refinance on similar conditions to what was offered in 2007 and will have to sell the property. And, that will lead to some sales coming onto the market.”

With more property stock becoming available, more deals are likely to take place, especially on the back of more positive sentiment. “We know there are plenty of cash-rich buyers in the region and worldwide who want to buy [real estate],” says Hughes.

Impact of M&A deals, recurring income

The Chicago-headquarterd JLL had also been aggressive in growing its presence around the globe through numerous merger and acquisition deals from 2005 to 2008. The most significant was its US$613 million acquisition of Dallas-based Staubach Co in July 2008. The firm, a specialist in tenant representation with a strong presence in the US commercial sector, was founded by former National Football League star Roger Staubach.

“Strategically, the deal [with Staubach] has plugged an important hole for us in our US business, and has given us more access to US companies,” says Hughes. And, JLL has been reaping the benefits of the deal in Asia-Pacific. “We’ve been talking to hundreds of large and medium-sized US companies every day, and when they say they are considering opening up in Singapore, Hong Kong or Shanghai, we can help them do so very quickly,” he says.

In 2008, JLL also formed a 50:50 joint-venture company with Sydney-based Commonwealth Bank’s Colonial First State Property Management to tap the booming retail market in Asia. Called Sandalwood, the joint-venture firm was created off the back of JLL’s existing retail management operations in Asia.

At end-2Q2009, however, JLL was said to have purchased Colonial’s stake in Sandalwood, which then became a wholly owned JLL entity. “They [Colonial First State] had a shift in strategy, and decided to concentrate most of their efforts on the Australian property market,” says Hughes.

Sandalwood has a very specific Asian focus, and the market where it has focused most of its energy on is China, the fastest-growing retail market in the region, he adds. “Even though we went from a joint venture to a wholly owned JLL entity, we still have an exclusive arrangement with Colonial, and if they want to do any business on the retail side in Asia, we are their natural partner.”

Even though the transactions business had dried up last year, JLL had a recurring-income business, namely facilities management (FM) and property management (PM). The firm was able to win new contracts of over 70 million sq ft last year, which takes the total managed portfolio in Asia-Pacific to over 800 million sq ft of space for the region, estimates Hughes.

In addition to FM and PM, JLL also provides a whole suite of real-estate services to major MNCs such as ANZ, Nokia and Shell.

These services include leasing administration, transaction services, consulting and project management. “Because of the strength of our contracted income, we were able to protect ourselves from the dramatic change in market circumstances and focus on growing our market share,” says Hughes. “Hence, our business model is good for volatile times, given the many different types of work that we do for our clients. And, it has a stabilising effect on our business as a whole.”

Commercial sector a laggard
The commercial sector is a lag indicator, both on the upside and the downside, says Hughes. When companies feel more confident about the market, it still takes typically another 12 to 15 months before they start looking at expanding their property portfolios. Hughes expects demand for business space to improve this year. “We’re right now in the classic lag period, when things are better and there’s a lot more positive demand, with more activity feeding through the commercial-property sector,” he says.

Activity has indeed started. For instance, in November, Ernst & Young, one of the Big Four accounting firms, signed a deal with the Shanghai World Financial Centre to take up eight floors in the landmark building in Lujiazui area in Pudong. It is considered one of the biggest occupational transactions in the history of Shanghai’s Grade A office market, and JLL is said to have brokered the deal. The accounting firm is expected to move into its new office in July.

Leasing activity in Singapore is already starting to pick up, with Nomura Holdings Inc reportedly expected to take up 100,000 sq ft at Marina Bay Financial Centre (MBFC). It will be moving out from its current premises at Suntec Tower 5 and Six Battery Road.

While Hughes is cautiously optimistic about the next 24 months and believes that Asia-Pacific will be the growth engine for the rest of the world, at least for the next few years, “there’s still a lot of economic uncertainty around the world”, he concedes. “I don’t think we can assume that everything will be plain sailing from here on.”

One of the risks is the huge amount of public- and private-sector debt to be refinanced in the West. “Nobody knows the implications of that on its  economy,” says Hughes. “One thing we have learnt from 2008/09 is that Asia-Pacific has not decoupled from the US, and if something were to happen to push those economies back into a downturn, that will have a ripple effect out here,” he points out.

Nevertheless, he describes his first year as CEO of JLL Asia-Pacific as “interesting, challenging and enjoyable”. “I’ve probably learnt more in the last 12 months than I’ve done in the previous five years,” he says.

Cecilia Chow is editor of City & Country at The Edge Singapore

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 791, Feb 1-7, 2010.


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