Look out for distressed assets

Source : Business Times - 11 Apr 2009

AS WITH all markets around the world today, distressed assets will in all likelihood come onto the market in Singapore too, providing investment opportunities for some. Alastair Hughes, chief executive of Jones Lang LaSalle (Asia-Pacific), said that commercial properties that were acquired last year at peak prices are more vulnerable.

Capital values are estimated to have fallen by about 40 per cent since the peak last year. As such, one can surmise that anybody who had acquired an office building in 2008 using more than 60 per cent leverage will likely be ‘reappraising their equity position’ and having urgent meetings with his bank.

‘In Singapore, as in most other markets around the world, there will be distressed assets coming to the market and we believe there will be good opportunities for cash-rich buyers,’ said Mr Hughes.

Jones Lang LaSalle (JLL) was involved in about 60 per cent of all office investment sales between 2006 and 2008. Over 50 per cent of these deals are estimated to be seeking some form of refinancing.

Of the last 20 deals done, Mr Hughes revealed that over 60 per cent of these are expected to have been by investors new to the Singapore market as well. While he said that there were no signs of distressed assets being put up for sale yet, he does believe that there are ongoing discussions between lenders and borrowers on how best to deal with the shortfall in values.

Banks will not want these properties to go into receivership but if a compromise cannot be agreed upon, and borrowers (investors) do not, or cannot, top up loans, the banks will have to sell the assets.

Interestingly, even with distressed assets becoming more available around the world, Mr Hughes says that the investment-sales market has come to a standstill.

Mr Hughes, who was until recently chief executive of JLL for Europe, Middle East and Africa (EMEA) and based in London, said: ‘It is virtually impossible to borrow more than £50 million (S$111 million) for a single acquisition these days. The market is starved of debt.’

There are a few international funds that are liquid but even these funds have not moved. ‘Yields may have risen to a level where they will not rise any more, but nobody knows how far rents will fall,’ he explained.

To emphasise this point, he pointed out that office rents in Singapore experienced the sharpest fall on record in the first quarter of this year and could still have some way to go.

As such, investments sales are not likely to contribute significantly to JLL’s bottomline for a while. Instead, with Mr Hughes’s posting to the Asia-Pacific, the new CEO will be looking at other arms of the business.

JLL has been growing its other services for some time but those such as corporate outsourcing, and energy and sustainability services are expected to now come to the fore. ‘The part of our business that is growing quickly is corporate outsourcing,’ he added.

For JLL, corporate outsourcing is where organisations outsource their real estate functions to them. JLL might then take over the management of these corporations’ real estate portfolio and their real estate department may even come under JLL’s payroll. In Singapore, clients include DBS Bank.

Approximately half of JLL’s Asia-Pacific revenue comes from facility and property management, with the other half from transactions and advisory work (that is, leasing, tenant representation and capital markets).

Corporate outsourcing comes under its Integrated Facilities Management Services (IFMS) arm. Not surprisingly, with cost-cutting on most occupiers’ minds, many want to know how they can reduce occupancy costs.

‘Occupiers want to reduce cost and real estate is one of the biggest costs,’ Mr Hughes said. Popular services include renegotiation or re-engineering of leases.

In recent years, JLL has also included energy and sustainability services to provide clients with assistance in developing their corporate sustainability strategies.

Last year, it documented $95 million in energy savings and reduced greenhouse gas emissions by 438,000 tonnes. One of its most prominent assignments currently is serving as programme manager of an energy and sustainability retrofit project for the iconic Empire State Building in New York.

For JLL, India and China do have huge growth potential. Interestingly, Mr Hughes says that there is ‘little investment activity’ in these markets at the moment.

But this is not to say that there is no real estate development. And every new building represents an opportunity for companies such as JLL.

Therefore, JLL is priming itself for growth in these markets of businesses related to facilities management and tenant representation. Underscoring this, in the Asia-Pacific, it has a staff strength of 18,000 compared to just 4,000 in EMEA where Mr Hughes was last posted.

Of course, any business related to real estate will be cyclical and JLL’s capital-markets services will swing back into action when the property market recovers. Currently, Mr Hughes expects the market to bottom in Q1 or Q2 of next year.

Singapore, Hong Kong, Japan and Australia will remain key capital markets because there is ‘usually a lot of activity in these markets’. Singapore is the Asia-Pacific headquarters for JLL and commercial investment sales amounted to $4.3 billion in 2007 and $2.2 billion last year here.

Regionally, it closed US$9.5 billion worth of deals in 2007 and US$4.6 billion last year. And while 2007 and 2008 may now seem like distant glory days, Mr Hughes is optimistic that the property markets will recover, ‘as they always do’.