In times of financial crises, companies rely more and more on the advice and forecasts of the expert consultants. But how much can their advice be trusted? Are their figures fact or fiction, accurate estimates or mere shots in the dark? The RFP team investigates.
Undeniably this financial crisis has hurt all sectors of society - including big corporate players who were previously in the driver's seat. Today, businesses of all sizes, in nations of all sorts, are worrying about their current survival. Short of panic, companies have been making adjustments in a flurried state to minimise ensuing fallout. Commercial real estate (CRE) is one cost area high on the list for targeted saving adjustments.
To establish if their organisation is paying real market rates for their real estate, to discern possible savings, and to estimate timelines for market recovery, C-suite executives are seeking the professional opinions of various real estate consultancy firms. For it is these service providers who sell themselves based on their global reach, expert local knowledge and commitment to diagnosing and monitoring economic conditions. Their responses are equivocal. expert "opinion"
In an effort to gauge the consistency of that expert opinion, RFP fixed its eye on three major financial hubs in the region: Singapore, Shanghai and Hong Kong. Despite the oceans of expertise available only phone calls away, there is little consolation for those seeking solid information: our findings were inconsistent and vague at best. This is not surprising, as one interviewee admitted, speculating corporate activity over the next few years was much like crystal-ball gazing.
We asked the ëDoctors' of CRE to advise us on the CRE sector's wellbeing based upon rental rates, new office space supply and vacancy figures. Each of the three cities presents a different case, depending on the aforementioned factors. Despite meeting with several experts, consensus and clarity could not be achieved due to the broad range of incongruent data, stemming from a plethora of uncontrolled variables. If anything, such a study only reveals how difficult it is even for the experts to deliver accurate prophesies.
rental rates
Rental value often serves as a market thermometer for CRE supply and demand, therefore rate fluctuations are important to monitor when evaluating a city's office sector performance. According to Savills' Regional Prime Office Occupancy Cost 2H08 chart, market levels across Asia are similar to those in 2004 and 2005. This report predicted that Singapore will experience a 40-50 percent decline in rents over the next two years. "When talking about rental falls we need to keep two things in perspective. First that we have seen a rapid run up in rents during 2007 and 2008 and that many landlords are still seeing positive reversions (renewal rents are higher than the passing rents set some three years ago)," says Christopher Marriott, Deputy Managing Director, Savills.
Piers Brunner, Colliers International's Chief Operating Officer for Asia, ventures that Singapore will dip even lower. "Singapore has probably corrected even further than Hong Kong at the moment, around 30 percent." Taking into account slated supply he predicts a further fall of equal proportions: "I think there will be at least a 50-60 percent correction. That's off a high base too, because it got up to SG$16-17 per sqf and the ten year average was about SG$8-10 per sqf." Offering a less severe account, Cushman & Wakefield expects a 35 percent drop in the Singapore market, according to its February 2009 report.
Such low rates are to be surpassed by Shanghai, according to Brunner, "The market that corrected the most severely was Shanghai. I think it's dropped from RMB8 to 6/day/metre," translating to a 25 percent decrease. Collier's Asia Pacific Office Space Overview, released in February, charts a peak in Q4 2008 at RMB12.5 per sqm/ day and a Q4 2009 prediction of RMB$7.5 per sqm/day - registering a whopping 40 percent drop by year end. Agency DTZ however, has less dramatic figures, forecasting a 30-35 percent plunge Year-on-Year. "Rents have been falling between 15 and 20 percent. And that trend is expected to continue because of the new supply," explains Mark Price at DTZ, "We see at least another 15 percent or so by the end of this year". If you speak to CBRE however, the forecast becomes even more temperate: "Puxi rents (gross) in 2009: [will] drop by 6-10 percent Y-on-Y" and "Pudong rents (gross) in 2009: [will] drop by 10-15 percent Y-on-Y." Jones Lang LaSalle (JLL) is also less pessimistic: "rentals for Shanghai office space continued to decline by 10.6 percent Q-on-Q [Q4 2008 to Q1 2009]."
supply and demand
Figures pertaining to new office supply, as quoted by several agencies, are also scattered across the board. Savills estimates Singapore will inherit 1 mil sqf of new supply in 2009 and an additional 2.5 mil sqf in 2010. Meanwhile Colliers expects 6.6 mil sqf to be unveiled during the same period. Such a divide can also be witnessed with Shanghai's numbers. JLL forecasts a mere 5.3 mil sqf of new space for 2009 while CBRE predicts 9.3 mil sqf and 11.8 mil sqf in the following year. With less active development, Hong Kong is definitely seen as the odd one out, with modest increments expected for this year, but again JLL sees 17,222 sqf on the horizon while CBRE envisions 2 mil sqf.
Consensus is not achieved with vacancy rates either. Savills predicts an increase of four percent for Singapore in 2009 while Cushman & Wakefield foretells a 13 percent hike. Numbers for Shanghai reveal similar incongruity. Colliers sets the bar at 10 percent for this year, while Savills pegs office space vacancy at 23 percent, with an estimated escalation of a further four percent in 2010. Most agencies are publishing less acute rates for Hong Kong, but the rest of 2009 poses difficult to estimate. DTZ stands by three percent while CBRE expects 14.4 percent.
Making the call
Such discrepancies beg the questions: ëWhy and how are industry experts coming out with such varied predictions?' and ëWhat are these figures based upon?' When asked about their means of data collection, Price at DTZ maintains, "We have a research team who collects data right across China. They don't just collect data, they have opinions and do work with our teams. A lot of the data has to be physically collected but we work out our forecasts based on historic trends, occupancy levels, type of occupier, industry sector demand." Savill's Marriott says, "We often adopt a multi-pronged approach to forecasting, combining regression modelling, cap-rate analysis and agency knowledge of local market trends." Roddy Allan, Associate Director, Asia- Pacific Research at JLL informs: "[Our] research team provides in-depth research advice through its subscription based Real Estate Intelligence Service (REIS). Our forecasts are prepared using state of the art regression-based analysis, and overlaid with qualitative inputs from local operatives to reflect our most accurate assessment of the respective property markets."
With wildly varying forecasts for rentals and
vacancy, and even greatly differing estimates on new supply, it is difficult for market watchers and players alike to give credence to advice on how much they should commit to the bottom line when it comes to making corporate real estate decisions. If there's one thing that the financial implosion has taught us, it's that it's time to reevaluate how we trust and interact with market "information" and sentiment. For the firms tasked with telling us how the markets are performing, and for the media outlets charged with bringing this information to the wider world, perhaps it's time to think twice about how much credence we give ourselves when we call the market.
The top 5 most expensive places to rent office space in the world?
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While calling micro markets is clearly fiendishly difficult, surely something as simple as asking where the most expensive rental markets are worldwide would pose less of a challenge?
DTZ, Mark Price:
1. Tokyo Central 5 Wards
2. Paris
3. Hong Kong
4. Dubai
5. London West End
Savills, Chris Marriott:
1. New York
2. London
3. Hong Kong
4. Tokyo
5. Singapore
Colliers, Piers Brunner:
1. Hong Kong
2. Moscow
3. Tokyo
4. London (West End)
5. Dubai
Cushman & Wakefield:
1. Hong Kong
2. Tokyo
3. London (West End)
4. Moscow
5. Dubai
Knight Frank, Mark Bernard:
1. Tokyo
2. Russia
3. Hong Kong
4. London
5. New York Consultan
