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World Office Yield Spectrum2H/2017

AsiaPacific

Americas

Europe

Africa

65Offices

105Offices

131Offices

Asia Pacific

273Offices

Midd

le East & Africa

133Offices

Ameri

cas & Caribbean

UK

, Ire

land & Channel Islands

Europe

Americas & CaribbeanBahamasBarbadosCanadaCayman IslandsColombiaGrenadaMexicoSt Kitts & NevisSt LuciaTurks & CaicosUnited States

UK, Ireland & Channel Islands EnglandGuernseyIrelandJerseyNorthern IrelandScotlandWales

Continental Europe AustriaBelgiumCroatiaCzech RepublicDenmarkFinlandFranceGermanyGibraltarGreeceItalyLuxembourgMonacoMontenegroNetherlandsNorway

PolandRussiaSerbiaSpainSwedenSwitzerland

Middle East & Africa BahrainBotswanaIsraelKenyaMauritiusMozambiqueNamibiaOmanQatarSeychellesSouth AfricaUnited Arab EmiratesZambiaZimbabwe

Asia Pacific AustraliaCambodiaChinaHong KongIndiaIndonesiaJapanMacauMalaysiaNew ZealandPhilippinesSingaporeSouth KoreaTaiwanThailandVietnam

Savills global presence

More than 700 owned and associate offices worldwide

World Office Yield Spectrum 2H/2017 | 3

Introduction

With investment capital becoming more global in its search for returns and diversification, the need for a standardised set of indicators to make sense of opportunities, risk and return expectations has become critical.

The Savills/Deakin University World Office Yield Spectrum is designed to fill a void in market knowledge.

For too long the global property investment community has been denied a credible, factual yields series which can be reliably used to compare ‘apples with apples.’ This unique global publication is the culmination of substantial work by dozens of researchers in the international Savills team.

Savills Research trusts you find this body of work useful, illuminating and of value to you in your endeavours. As always your thoughts, feedback and ideas are most welcome. Please feel free to contact your Savills representative with regard to this publication.

Methodology

Market YieldsThis yield is derived by capitalising current market rents (Net Face) against current capital values for office buildings. The Net Face rent is the rent payable by the tenant excluding both statutory and operating outgoings (recoverables) and includes the value of any incentive paid to the tenant by way of fitout, cash, rental rebate or rent free. The capital value is calculated to be for the office component only and excludes retail, excess car parking, signage, storage and other “non-office” sources of income.

Effective YieldsThis yield is derived by capitalising current market rents (Net Effective) against current capital values for office buildings. The Net Effective rent is the rent payable by the tenant excluding both statutory and operating outgoings (recoverables) and excludes the value of any incentive paid to the tenant by way of fitout, cash, rental rebate or rent free. The capital value is calculated to be for the office component only and excludes retail, excess car parking, signage, storage and other ‘non-office’ sources of income.

Weighted Average Cost of Capital (WACC)The WACC is derived by having reference to the rents described above, the rental growth outlook and the management fee recoverable from owning the building (in sum a proxy for equity) and the current cost of debt. Using a 30 percent/70 percent equity/debt split, a WACC is calculated.

Accretive PremiumsBy subtracting the effective and market yields derived above from the WACC we can calculate the ‘accretion’ inherent in each market using the metrics as described.

Market Risk PremiumsHaving reference to the market yield calculated above we subtract the risk free rate (10 year bond) then add the expected annual income growth rate to establish the ‘expected return for risk.’

Effective Risk PremiumsHaving reference to the effective yield calculated above we take that yield, subtract the risk free rate (10 year bond) then add the expected annual income growth rate to establish the ‘expected return for risk.’

4 | World Office Yield Spectrum 2H/2017

World Cities

Expectations of higher

interest rates have

remained just that,

expectations. Uneven

economic data as well as

rising geo-political tensions

have combined to create an

unstable environment for

rate increases.Looking at the market over the next six months, a healthy deal pipeline and plenty of momentum suggest that real estate has not fallen out of favour as an asset class.

While prices remain generally high or continue to rise, however, volumes have softened as willing sellers are currently thin on the ground and potential purchasers balk at high valuations. We continue to believe that there is no shortage of capital out there and sovereign funds and institutions continue to raise their allocations to real estate, in some cases from single to double digits. Chinese capital meanwhile is becoming more selective.

With treasuries set to continue to underperform, real estate will remain a popular investment class and today’s low yielding environment should therefore persist. Should interest rates rise without being underpinned by strong growth (higher rental income), however, current yield levels would quickly look unsustainable.

Investment strategies are being influenced by opportunities being presented by digital disruption as well as demographic trends such as aging populations, urbanization and the rise of the millennial generation. Technology meanwhile continues to defy traditional definitions of real estate use as, for example, the difference between living and working environments and traditional bricks and mortar retail and logistics become less clear cut.


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

World OfficeCBD Grade A Effective Yields (%) by Region and City

Jun-17

Australia/NZ

Asia

Europe

United States

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

World OfficeCBD Grade A Market Yields (%) by Region and City

Jun-17

Australia/NZ

Asia

Europe

United States

World Office CBD Grade A Effective Yields (percent) by Region and City June 2017

World Office CBD Grade A Market Yields (percent) by Region and City June 2017

Simon Smith Senior Director – Research Asia Pacific

+852 2842 4573

[email protected]

Source: Savills Research



-1%

0%

1%

2%

3%

4%

5%

6%

-1.0%

-0.5%

0.0%

0.5%

1.0%

-1.0%

-0.5%

0.0%

0.5%

1.0%

0%

1%

2%

3%

4%

5%

6%

0%

2%

4%

6%

8%

10%

0%

2%

4%

6%

8%

10%

Market Yields June 2017 Effective Yields June 2017



Source: Savills Research Source: Savills Research



Market Yield Change January 2017 – June 2017 Effective Yield Change January 2017 – June 2017

Market Risk Premium June 2017 Effective Risk Premium June 2017

World Cities/CBD/Grade A Office


Cross-Border40%

Institutional20%

REIT/Listed13%

Private2%

User/Other4%

Government3%

Owner Occupier20%

Asian OfficeOffice Property Buyer Profile (%)

6 months to Jun-17

Asia

For three years running,

optimism has dominated

the Asian office sector

as cheap money has

continued to flood local

markets and rents and

capital values have

continued to rise across the

region. The increasing capital inflows have resulted in cap rate compression to decade lows but buoyant demand has inevitably lead to more new prime office completions and vacancy rates are finally beginning to creep up.

Investors have generally adopted a positive outlook for local office markets, their confidence bolstered by strong economic growth expectations. The most active markets have been China, followed by Japan and Hong Kong. However, limited stock available for sale in prime areas has meant that investors have increasingly turned their attention to development projects in secondary locations. Consequently, transaction volumes of income producing assets have dropped significantly and are unlikely to revert in the short term.

Overseas investors’ transaction volumes increased by between 1% and 39% in 1H/2017 compared with 1H/2016, remaining in positive territory. The global search for yield has traditionally been one of the main reasons behind investment in the Asia Pacific office sector and China has remained a top pick for overseas investors given the market’s size and importance for any truly global asset manager.

Regarding Asia Pacific outbound investment in the office market, three major capital sources have proved dominant; Hong Kong; China; and South Korea. The UK was the most attractive destination for Asian investors (despite the risks of Brexit) due to a weak pound, followed by the US.

While there is a long term argument that asset values in the

Asian Office Property Sales (US$ million) June 2007 – June 2017

Asian Office Property Buyer Profile 6 months to June 2017

Source: RCA/Savills Research


Simon Smith Senior Director – Research Asia Pacific

+852 2842 4573

[email protected]

Asian office markets reflect qualitative easing rather than economic fundamentals, looking ahead, we would pay attention to the impact of volatile swings in global capital flows and currency movements once the interest rate environment begins to normalize.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Asian OfficeOffice Property Sales (US$m)

Sep-07 to Jun-17



-1%

0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

World OfficeAsian CBD Grade A Effective Yield Change (%)

Jun-16 to Dec-16


-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

World OfficeAsian CBD Grade A Market Yield Change (%)

Jun-16 to Dec-16


Asia/CBD/Grade A Office










Institutional55%

REIT/Listed19%

Private/Unlisted21%

User/Other3%

Unknown 2%

Europe and UK OfficeOffice Property Buyer Profile (%)

6 months to 2017

0 €

50,000 €

100,000 €

150,000 €

200,000 €

250,000 €

300,000 €

Europe and UK OfficeOffice Property Sales (€m)

Dec-07 to Jun-17


UK/Europe

Europe and UK Office Property Buyer Profile 6 months to June 2017

Lydia BrissyDirector – Research Europe

+33 1 44 51 73 88

[email protected]

Europe and UK Office Property Sales (€ million) December 2007 – June 2017


Our projection for the total investment volume is that it will remain broadly in line with last year’s levels, potentially 5-10% lower, in the region of €200bn.

With the threat of anti-EU parties alienated, the downside risks to the European economy are considered marginal. Total commercial investment activity in Q1 2017 was in the region of €44.5m, in line with the same quarter last year but 37% below Q4 2016. The share of the core markets dropped further from 66.6% last year to 65.1%, compared to 70% in 2007. This is the result of the high liquidity, which has spread beyond the core markets where the supply of quality product has become limited. Rising cross border investor interest in Nordic countries and the high volume of cross border investment in Germany, France, Italy and the UK have squeezed the share of domestic investment. In Q1 2017 the average European prime CBD office yield dropped for the first time on record just below 4%. We expect the average CBD office yield to remain slightly below 4.0% during the course of the year. Less prospects for capital gains has shifted investor focus on income. In the office sector good fundamentals shaped by economic resilience, demand for quality space and restricted development pipeline support a positive outlook for prime values in the CBD locations. Our forecast for the average annual rental growth at the end of 2017 is 3.6%, driven by Oslo (28.2%), Stockholm (8.3%), Amsterdam (8.0%) and Paris CBD (7.6%).



0%

2%

4%

6%

8%

10%

0%

2%

4%

6%

8%

10%

-1.0%

-0.5%

0.0%

0.5%

1.0%

-1.0%

-0.5%

0.0%

0.5%

1.0%

World OfficeEuropean CBD Grade A Effective Yield Change (%)

Jun-16 to Dec-16


0%

1%

2%

3%

4%

5%

6%

World OfficeEuropean CBD Grade A Effective Risk Premium (%)

Jun-17


0%

1%

2%

3%

4%

5%

6%

World OfficeEuropean CBD Grade A Market Risk Premium (%)

Jun-17










Europe/CBD/Grade A Office


$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

Trust5%

Fund26%

Private Investor39%

Foreign Investor22%

Owner Occupier7%

Undisclosed1%

United States OfficeOffice Property Buyer Profile (%)

Year to May-17

United States

The U.S. economy posted

its 81st consecutive month

of private sector job gains

during June – the longest

stretch of gains on record.

Employers in many different

industries and cities cite

talent shortfalls as their

biggest challenge. Similarly, investors face difficulty finding enough quality assets to purchase. Based on sales through May, commercial property sales in the U.S. totalled $154.9 billion, down by 15.0% year-on-year. Transaction activity has declined 12 of the last 16 months. So far, this still appears to be primarily a supply shortfall. Even as volume has declined, pricing has not dropped.

Demand for assets remains strong, but many investors have become increasingly discerning. More buyers are steering clear of sub-4.0% cap rates in gateway markets such as New York City and San Francisco. Buyers continue to push to secondary markets and niche assets, however; there are only so many institutional-grade assets in Austin, Nashville or similar cities. Far fewer entity-level and portfolio sales have been completed, particularly in the industrial and multi-family sectors. Some buyers are stepping well outside of their comfort zone as they try to diversify. Blackstone, for example paid $745 million for 3,400 senior housing units from Welltower and $1.1 billion for 64 properties operated by Brookdale Senior Housing.

Chicago is a good example of how the dropoff in volume is tied to a winnowing of quality assets. Many of its trophy towers were sold in 2014 and 2015. Office property sales have shifted to value-add assets. These buildings could have a strong upside for owners that invest in capital improvements and assuming that demand holds up in this market.

The steepest part of the cycle in terms of NOI growth is in the

United States Office Property Buyer Profile Calendar year to May 2017


Keith DeCoster Director, US Real Estate Analytics

+1 (212) 326 1023

[email protected]

United States Office Property Sales (US$ million) June 2007 – June 2017


rearview mirror for most markets. Some office and industrial markets seem to have more room for growth, though. This includes many of the top tech markets – Silicon Valley, Seattle and Boston. These markets have punched through the IPO contraction and devaluation of 2016. Assets in these core tech markets are priced to perfection, though, with cap rates consistently under 6.0% and pricing generally exceeding $400/sf. Sunbelt markets such as Dallas/Fort Worth, Atlanta and Phoenix have a bit more life in terms of rental rate growth, and cap rates for most assets are 150 to 250 basis points higher with pricing typically under $300/sf.


-1.0%

-0.5%

0.0%

0.5%

1.0%

-1.0%

-0.5%

0.0%

0.5%

1.0%

0%

2%

4%

6%

8%

10%

0%

2%

4%

6%

8%

10%

0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

United States/CBD/Grade A Office










Chris Freeman National Head, Capital Strategy

+61 (0) 2 8215 6093

[email protected]

Australia/New Zealand

Whilst appetite for

Australian commercial

property remains strong,

diminishing supply weighed

on investment volumes in

FY-17 Australian performance drives overseas investor activity in FY-17

Savills recorded $15.1bn of major office sales over FY-17, which while down on the record set in FY-16, was over 50% higher than the 10 year average of circa $10bn.

The standout statistic was the high proportion of overseas buyers that represented 50% of acquisition volume for the year, although domestic demand remained evident with Dexus concluding the largest acquisition with $722.6m for 50% of Sydney’s MLC Centre.

Clear bias from overseas investors was shown for the strongly performing markets of Melbourne and especially Sydney, where a tight leasing market, due to material stock withdrawals, drove effective rental growth upward of 35% in Grade A stock. However with tightening yield and IRR hurdles, as the industry continues to adjust to a 10yr Bond Rate at sub 3.0%, capital growth was evident across the country.

FY-17 may also be remembered as the year the two-speed nature of the Australian economy and property markets began to normalise. While a number of economic indicators have heavily favoured NSW and Victoria over recent years, strong growth in corporate revenues for the mining sector, and a trend toward tenant re-centralisation, led to positive net absorption results across both the Brisbane and Perth; with those two markets also recording meaningful declines in vacancy.

As such, a number of domestic investors have focused on counter-cyclical opportunities, although Sydney still looks attractive due to low upcoming supply, while Melbourne’s economic outlook and demand drivers now lead the nation.


Office Property Buyer Profile12 months to June 2017

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

Australian OfficeOffice Property Sales (AU$m)

Jun-07 to Jun-17


Office Property Sales (AU$ million) June 2007 – June 2017

Fund16%

Trust13%

Developer5%

Owner Occupier2%

Government3%

Syndicate1%

Foreign Investor50%

Private Investor8%

Other2%

Australian OfficeOffice Property Buyer Profile (%)

12 months to Jun-17



-1.0%

-0.5%

0.0%

0.5%

1.0%

World OfficeAustralia/New Zealand CBD Grade A Market Yield Change (%)

Jun-16 to Dec-16


0%

1%

2%

3%

4%

5%

6%

World OfficeAustralia/New Zealand CBD Grade A Effective Risk Premium (%)

Jun-17


0%

2%

4%

6%

8%

10%

World OfficeAustralia/New Zealand CBD Grade A Market Yields (%)

Jun-17


Australia/New Zealand/CBD/Grade A Office







Market Yield Change June 2016 – December 2016 Effective Yield Change June 2016 – December 2016


0%

2%

4%

6%

8%

10%

World OfficeAustralia/New Zealand CBD Grade A Effective Yields (%)

Jun-17


0%

1%

2%

3%

4%

5%

6%

World OfficeAustralia/New Zealand CBD Grade A Market Risk Premium (%)

Jun-17


-1.0%

-0.5%

0.0%

0.5%

1.0%

World OfficeAustralia/New Zealand CBD Grade A Effective Yield Change (%)

Jun-16 to Dec-16



About

Savills With a rich heritage and a reputation for excellence that dates back to 1855, Savills is a leading global real estate provider listed on the London Stock Exchange.

Savills advises corporate, institutional and private clients, seeking to acquire, lease, develop or realise the value of prime residential and commercial property across the world’s key markets.

Savills is a company that leads rather than follows with more than 700 owned and associate offices throughout the UK, Europe, Americas, Asia Pacific, Africa and the Middle East. With more than 30,000 staff, we seek out people who possess that rare mix of entrepreneurial flair and rock solid integrity, and are focused on delivering clients with advice and expertise of the highest calibre.

A powerful combination of global connections and deep local knowledge provides Savills with an almost unparalleled ability to connect people and property.

Savills extensive Asia Pacific network spans 50 offices throughout Australia, New Zealand, China, Hong Kong, India, Indonesia, Japan, Korea, Macao, Malaysia, Myanmar, Philippines, Singapore, Taiwan, Thailand and Vietnam.

Savills offers the full spectrum of services from providing strategic advice to managing assets and projects and transacting deals. With a firmly embedded corporate culture that values initiative, innovation and integrity, clients receive outstanding service and can be assured of the utmost professionalism.

For advice that gives advantage, contact Savills.

Deakin University Through its agenda LIVE the future, Deakin aims to build the jobs of the future, using the opportunities of the digital age to widen access to education and make a difference to the communities it serves.

Deakin enjoys a reputation for being accessible, helpful and friendly. It has a longstanding record for its use of cutting-edge information technology while providing highly personalised experiences, whether in the cloud on Deakin’s media-rich campuses or through a combination of cloud and campus learning. Deakin has over 50,000 students, with a third choosing to study wholly in the cloud (online).

Deakin was awarded a 5-star rating by the prestigious university ranking organisation Quacquarelli Symonds (QS); the rating indicates Deakin is world-class in a broad range of areas, has cutting-edge facilities and is internationally renowned for its research and teaching. Deakin is in the top 50 of the QS ranking of the world’s universities under 50 years.

Deakin is now in the top 3 percent of the world’s universities in each of the three major international rankings including the prestigious Shanghai Jiao Tong Academic Ranking of World Universities (ARWU), Times Higher Education and QS World University Rankings. Established in 1974, Deakin was Victoria’s fourth university and the first in regional Victoria. In 2014 Deakin celebrated its 40th anniversary.

Deakin has been strengthened by a series of successful mergers with strong partners, each of whom has contributed significantly to our character and approach. Today, Deakin operates in a global, connected world with the digital economy influencing every aspect of our activities.

Professor Richard ReedChair in Property & Real Estate

+61 (0) 3 9251 7605

[email protected]

Chris Freeman National Head, Capital Strategy

+61 (0) 2 8215 6093

[email protected]

United Kingdom Simon HopeHead of GlobalCapital Markets+44 (0) 20 7409 [email protected]

Rasheed HassanDirector, Head ofCross Border Investment+44 (0) 20 7409 [email protected]

Ned BaringDirector, ResidentialCross Border Investment+44 (0) 20 7409 [email protected]

Savills Investment Management Jon CrossfieldHead of Investment Mandates+44 (0) 207 409 [email protected]

Europe Tristam LarderDirector, European Investment+44 (0) 20 7409 [email protected]

Chris GillumDirector, European Investment+44 (0) 20 7409 [email protected]

Asia Pacific Frank MarriottRegional Director,Investment Advisory+852 2842 [email protected]

Middle EastHassan FarranDirector, Cross Border Investment+971 56 607 [email protected]

AustralasiaPaul CraigCEO+61 (0) 2 8215 [email protected]

North AmericaMichael O’CallaghanSenior Managing Director+1 (212) 328 [email protected]

Richard StevensonAssociate Director+1 (212) 328 [email protected]

Savills Key Contacts

Cross Border Investment

Revisions: None for this edition.

This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills. © Savills 2017

Worldwide ResearchAsia PacificSimon SmithSenior Director, Research +852 2842 [email protected]

AustraliaChris FreemanNational Head, Capital Strategy+61 (0) 2 8215 [email protected]

BelgiumHenry ColleSenor Investment Analyst+32 2 542 40 [email protected]

ChinaJames MacdonaldHead of Research China+8621 6391 6688james.macdonald@ savills.com.cn

Jack XiongHead of Project & Development Consultancy, Beijing+8610 5925 [email protected]

Dahuang Chen Associate Director of Research +8623 6370 3388 [email protected]

Robert Ritacca Senior Manager of Research +86755 8828 5241 [email protected]

DenmarkCasper AbildInvestment Analyst+45 3364 [email protected]

EuropeMat OakleyHead of European Research+44 (0) 20 7409 [email protected]

Lydia BrissyEuropean Research Director+33 1 44 51 73 [email protected]

Eri MitsostergiouEuropean Research Director+40 7 2820 [email protected]

FranceMarie Josée LopesHead of France Research+33 1 44 51 17 [email protected]

GermanyMatthias PinkHead of Germany Research+49 30 726 165 [email protected]

Hong KongJack TongDirector, Research & Consultancy+852 2842 [email protected]

IndonesiaAnton SitorusDirector, Research & Consultancy+62 (21) 293 293 [email protected]

IrelandJohn McCartneyDirector of Research+353 1 618 [email protected]

ItalyCristina TaccagniBusiness Executive Assistant+39 02 3600 [email protected]

JapanTetsuya KanekoDirector, Research and Consultancy+81 (3) 6777 [email protected]

KoreaJoAnn Jieun Hong Director, Research & Consultancy+82 (0) 2 2124 4182 [email protected]

LuxembourgEsther Himbert Advisor+352 20 60 65 24 [email protected]

NetherlandsJordy Kleemans Head of Research & Consultancy+31 (0) 20 301 2000 [email protected]

New ZealandSteven DunlopDirector, Valuation & Advisory +64 (0) 9 951 5917 [email protected]

PhilippinesFredrick RaraManager, Research & Consultancy+632 403 [email protected]

PolandWioleta WojtczakAssociate Head of Research+48 (0) 600 422 216

[email protected]

SingaporeAlan CheongSenior Director, Research & Consultancy+65 6415 [email protected]

SpainGema de la Fuente Director, Research +34 91 310 10 16 [email protected]

TaiwanErin TingAssociate Director+886 (2) 8789 5828 [email protected]

United StatesKeith DeCosterDirector, US Real Estate Analytics+1 (212) 326 [email protected]

VietnamTroy GriffithsDeputy Managing Director+84 (0) 933 276 [email protected]

World ResearchYolande BarnesDirector, World Research+44 (0) 20 7409 [email protected]

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world office yield spectrum - pdf.savills.asia · the savills/deakin university world office yield...

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