How to achieve capital appreciation for older buildings

Real estate investors and buildings owners are overlooking US$40 billion of unrealized value in their aging assets. According to JLL’s latest research, over half of the buildings in Asia Pacific are now over 20 years old, and this represents a fast-growing gap between the rental yields in premium buildings – those which are new and contemporary or recently upgraded – versus the rest of the market, resulting in the depreciation of value in mature real estate.

In fact, mature estates are showing signs of rental declines of 10 per cent to 40 per cent as compared to newer and well-maintained properties. As the global economy remains uncertain with most of the world still plunged in the battle of COVID-19, asset enhancement is a key development project for landlords to remain relevant in attracting and retaining tenants, hence achieving sustainable capital appreciation.

Multiple businesses and lifestyle trends have already shown accelerated growth, in parallel with the immense pressures caused by COVID-19. For instance, office employees are increasingly adopting a Hybrid working model which includes more flexibility. This translates to a stronger demand for coworking or flexible spaces and digitalized work innovations. E-commerce is also booming due to evolving consumer demands and shopping habits. Sustainability is becoming more prominent in many organizations’ agendas as the fight against climate change picks up pace.

The pandemic has created much uncertainty and changed the dynamics of the market and tenant expectations. Buildings of today no longer yield the same value as before. To connect and complement the tenants’ needs, property owners must stay relevant by keeping pace and staying ahead of the curve.

Asset enhancement is not as simple as refurbishing or restoring the exterior facade of a building or its premises. It goes beyond and considers other factors such as maximizing the allowable floor area ratio in proportion to the magnitude of land, identifying additional sources of revenue, and reducing operating costs. Implementing design features, extensive upgrades and even repositioning or repurposing the entire property is an asset enhancement strategy to improve the functional, operational and aesthetic characteristics of a property, and take advantage in changes in end user preferences and associated demand.

In this new digital age, changes have become so rapid that mature estates have failed to keep up. As a result, some have started to become obsolete and outdated. The key challenge that investors and building owners are currently facing is the uncertainty of how to define and implement definitive enhancements. We believe that being relevant and keeping updated with the market trends, while observing and analyzing the impact of innovation and data would enable investors to pinpoint a superlative enhancement strategy, resulting in an increase in asset performance and value.

Asset enhancement is the glue that connects greater visions for investors such as corporate sustainability goals and the adoption of technology. The current social and economic uncertainties have impacted various real estate sectors in Asia Pacific. However, through modernized asset enhancement strategies for aging estates, it is increasingly clear that now is the time for building owners to develop their assets to take advantage of the situation or risk getting left behind.

Andrew Macpherson is Head of Asset Development at JLL Asia Pacific.