Over $40B untapped value tied up in Asia Pacific properties
JLL estimates at least 100 office buildings in Hong Kong are in need of significant upgrading to remain relevant and attractive to their tenants.
The situation is similar in Asia Pacific as half of investment properties in prime locations are over 20 years old.
It leads the real estate firm to forecast that there is over US$40 billion worth of unrealized value in aging and underperforming properties regionally.
Given that more than 50% of Grade A and Grade B office buildings in Hong Kong were built more than 20 years ago and there will be significant new office supply coming into the market, JLL believes at least 100 buildings need to implement asset enhancement strategy to retain the asset values. Without asset enhancement, offices, shopping malls, hotels, residential buildings and industrial facilities will lose relevance due to evolving end-user habits and preferences, according to the firm’s latest ‘Unlocking Value in Real Estate’ report. JLL’s research reveals that rental rates for aged and outdated buildings are between 10% to 40% lower than up-to-date, well-managed properties in similar locations.
This marked difference in rates may also increase as newer post-pandemic designed buildings enter the market. “With COVID-19 changing market dynamics and tenant expectations, many existing buildings no longer yield the same value as before the pandemic,” says Andrew Macpherson, Head of Asset Development, JLL Asia Pacific.
“To stay relevant, attract tenants and meet their evolving demands, landlords and investors alike are increasingly aware of the need to enhance their built assets, ranging from design improvements to extensive upgrades, and even repositioning or repurposing the entire property.” Furthermore, in older buildings’ energy and maintenance systems are often less efficient, leading to increased operating costs, making a strong case for investors and landlords to reconsider design and asset enhancement strategies for aging properties. Driven by the accelerated demands for health and wellness features, enhanced human experience, sustainability and technology tools following the pandemic, JLL has identified five sectors that present the most potential for asset enhancement:
Office – workplaces should be able to accommodate new modes of working such as safe and flexible spaces, wellness amenities, and new ways of charging for leases.
Retail – malls must move fast in response to the accelerated rise of e-commerce, with implications for the size and use of space. The tenant mix is also changing, with more F&B and experiential retail features coming into play.
Industrial – warehousing and logistics are evolving to cater to the demands of same day delivery and increased levels of robotics, automation and increased sustainability targets. The future deployment of electric vehicles and drones will also have a significant impact on the bricks-and-mortar element of the logistics sector.
Hotels – certain older properties are being converted and repurposed to co-living or serviced apartments, and other hotels are adopting proptech more quickly for operational efficiency.
Residential – there are opportunities to develop co-living, senior living, student housing and mixed-use developments, while incorporating work-from-home and other lifestyle trends.
Mr Macpherson concludes: “The key challenge that investors and building owners now face is how to define and implement the right scope of enhancement to deliver the best returns over a specific investment time period. We believe that staying up to date with market trends and keeping an eye on the impact of innovation, coupled with the extensive use of data, benchmarking and analytics will enable investors to identify the optimal enhancement strategy, resulting in an increase in asset performance and value.”