How to achieve capital appreciati­on for older buildings

- by Andrew Macpherson

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.

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