Markets avoid uncertainty and that aversion has been evident in Greater China this year as never before as the COVID-19 crisis disrupted the region’s economy and drove steep reductions in new leases and real estate investments during the first half of the year.
With the pandemic now entering its tenth month, however, green shoots of recovery have been observed, especially in mainland China, following its successful curb of the COVID-19 spread. With domestic market activities starting to pick up its pace, investors are now more determined to gauge what pricing the market will bear, and understand what new market benchmarks may be arising.
For Sylvia Lau, the Head of Valuation Advisory for Greater China at JLL, the solution is to meld existing best practices with new tech tools to transform valuation into a more dynamic and transparent process.
Navigating Uncertainties with Best Practices
“I have been managing valuations on behalf of JLL clients since 2008, but this year is unlike any other,” Lau said. “Nonetheless there are silver linings in every crisis and for us it’s an opportunity to transform the way we work and serve our clients by bringing together a set of best practices. For instance our commitment to build a data-enabled valuation and advisory platform has been ongoing even before the crisis hit and now it’s certain that we are heading towards the right path.”
It is commonly agreed that there has been a pricing reset for properties across sectors and falling values are taking a toll on investment and refinancing sentiment. The key question here is with a sharp drop in deal flows, many data points are missing for valuers to carry out their work and this is where human insights become essential to fill the gap. “As much as we focus on digital development on data collation and analysis, one thing that remains unchanged is that people will always be our greatest assets,” Lau added.
With over 350 professionals in the Valuation Advisory department charged with assisting asset owners and buyers in determining justifiable market prices for assets, the JLL team has been busy assisting some of the region’s largest developers, fund managers and government as they face unprecedented uncertainty, underlining more than ever the need for a trusted partner that can provide reliable, data-backed valuations, amid the turmoil wrought by COVID-19.
Connectivity Amid Calamity
“Valuations have always been about leveraging access to information to help asset owners better understand how their properties fit into the market context,” said Dorothy Chow, a Senior Director with the Valuation Advisory team in Hong Kong. “In spite of the need to work remotely on and off for much of this year, our team has become more connected than ever, both amongst ourselves and with the hundreds of brokers that JLL employs in the Greater China market,” Chow added.
With tenants suffering from the downturn, landlords have been lowering rental rates on new leases or offering incentives that are having an impact on asset values, which will need to be accounted for by investors when calculating the NOI.
JLL’s team has been making reference to the first-hand information it has derived from its brokerage team as well as landlords to compare historic face rents with recently achieved levels to provide insights into necessary cap rates adjustment for investors.
With landlords facing questions regarding which tenants may renew, as well as uncertainty in the outlook for new leasing, JLL’s valuations team has also relied on its ability to draw information from brokers that meet daily with both tenants and asset owners in the office, retail, logistics and other sectors in the region to keep track of what’s happening on the ground.
“In the past, most clients have been well-served with annual valuations on their assets,” said Alkan Au, also a Senior Director with the Valuation Advisory team in Hong Kong. “Now, however, with new government policies emerging and the rental environment evolving day by day, more clients are better served by semi-annual, or even quarterly reports on their portfolios to put valuation under frequent review.”
Increasing Transparency in Mainland China
In Mainland China, Perri Yu, a Senior Director responsible for institutional valuations, notes that while the market has made great strides in achieving transparency, evidential data such as comparables may be less freely accessible and available, particularly for more complex or niche market transactions. “Valuation lag is another common challenge, however as the market condition improves with new supporting evidence, the post COVID-19 impacts on real estate valuation will be better reflected in Q4.” Yu added.
Nonetheless, new policies and trends shall continue to underpin the strong fundamentals of the real estate industry in China and further increase transparency. The announcement of a pilot programme for publicly-traded REITs to fund infrastructure projects, such as highways, logistics facilities and industrial parks, will help get China’s economy back on its feet and it’s also a milestone shift from a reliance on debt. The potential market cap for “C-REITs” is enormous and the market shall expect a rise for information disclosure from the new listed entities.
“Alternative real estate investment such as cold chain and data centres have proven resilient even during the lockdown period, which helped create demand for new high-quality data to attract investors and provide benchmarks during the underwriting process,” Yu said.
Logistics Expertise Rises with the Market
While some sectors, such as hotels and retail have suffered from the decrease in cross-border travel and the impact of lockdown periods, some large slices of the region’s real estate have seen increased demand this year, creating opportunities for investors.
“Despite the Covid-19 challenges there are some bright spots in the market, and one that we continue to focus on is the logistics sector. A number of institutional investors have been actively looking to partner with local developers as the underlying drivers are more resilient,” said Yu. The team has been ramping up effort in providing data-driven advisory services such as site selection as well as portfolio management dashboard based on geographic information system (GIS) and spatial analysis.
“The data can be further transformed into compelling infographics through JLL’s visualisation platform, where corporate users can be better engaged in the process with real-time access to information on our self-developed digital platform Harvest.” This is just one such example of how digitalisation is enabling operators and investors to make more informed decisions while managing their portfolios.
“We realize that with some segments formerly seen as niche markets moving to center stage, our depth of sector driven expertise will become increasingly important in this new era and, given our unrivaled market share in the logistics market – as high as 70 percent across 58 cities in China – we are leveraging our strength to turn data into value-adding logistics insights,” Lau added.
IPO Market Stays Strong
While 2020 has produced varying results for property owners, this has been a strong year for initial public offerings in Hong Kong, where the city’s stock exchange is on track to secure a top three global IPO fundraising position once again.
“Being the leading international valuer in the Hong Kong IPO market for more than 15 consecutive years, our position in this area remains strong and the team is also currently working on the largest real estate company listing for this year,” said Lau.
The region’s builders have also been active in listing their service divisions in Hong Kong, with well over a dozen property management firms having filed for IPOs on the HKEX this year, setting a record high. “The market capitalisation of such companies has surged on average since going public and we will also see more M&A activities as the segment integrates, another area we’ve had extensive experience in providing business valuation services,” Lau added.
This sponsored feature is provided by JLL Valuation & Advisory Services Greater China. To find out more about how the market is changing and how JLL’s VAS department can assist, please click here.