On 1st June, Lead8 and AsiaProperty magazine hosted a roundtable event in Hong Kong with a panel of architects, investment managers and developers in Hong Kong to discuss the topic of asset repositioning and renovating.
Panel of speakers include: Allan Lee (Principal, Pamfleet); Claude Touikan (Co Founder & Executive Director, Lead8); Edmond Yew (Senior Vice President, Lai Fung Holdings); John Denton (Co Founder & Executive Director, Lead8); Justin Wai (Principal, Blackstone Group); Shirley Lam (Head of China Investment Property, MTR Corporation) and Tom Miller (Head of Development, Asia Pacific, LaSalle Investment Management).
The June issue of AsiaProperty magazine features highlights of the event and tips from the development and investment experts for getting the maximum value from existing properties.
Assets star again with right remake
AsiaProperty’s roundtable panel of development and investment experts trade tips for getting the maximum value from existing properties, while avoiding the pitfalls of full-scale redevelopment
Repositioning a real estate asset can be a low-cost way to add value, but is not necessarily an easy short-cut.
For the second of AsiaProperty’s quarterly development and asset management features, a panel of architects, investment managers and developers gathered in Hong Kong to discuss the best way to add value to assets.
They agreed that forming a strategy for the asset was crucial in determining whether to opt for a full-scale redevelopment or a repositioning. The latter covers a broad range of activities, from lease renegotiation to a major physical remodelling of the asset.
Key factors in the success of a repositioning project include an understanding of local planning regulations, for example gaining a change of use of permission to demolish is much harder in developed markets.
Timing is also crucial, particularly for fund managers that need to add value in a limited time to allow them to exit their investment.
What are the fundamental questions to be answered when considering whether to redevelop or reposition a building?
TOM MILLER: For us, it depends on what basis we acquire the building. In those early stages of the acquisition process we have to analyse what are the options for creating value in the building. Do we want to tear it down or reposition it? A lot of the time the buildings come with restrictions.
Here in Hong Kong, repositioning would be the answer to a lot of buildings, ie: take an existing building, improve it, and hopefully it’s worth a lot more when you sell it. As a closed-end fund we have to do things in a limited time frame, as we normally only have three to four years to make the change, then its time to move on, ie dispose of the asset.
As a fund manager, we look to maximise our return and the shorter the timescale the better. As long as you can plan for it and have a reasonable certainty of that timing, it’s okay. But as soon as that timing becomes uncertain (as it can do in Hong Kong with the uncertainty of the town planning board and land department processes), the less we are inclined to do a full greenfield development, simply because we can’t risk it dragging on for many years; the value addition has to be realised in three or four years.
JUSTIN WAI: Our overriding principle is consistent with what Tom described. As a rule, we prefer repositioning due to the time and execution risks associated with a redevelopment. In assessing whether a building is fit for repositioning, our fundamental question is whether the property has good “bones”. For example, does it have sufficient ceiling height and logical layout/circulation? lf it does, we typically opt for repositioning.
But some buildings just won’t work fundamentally as they are; then our question is whether we can execute a redevelopment within our targeted investment period and generate the returns our investors expect.
JOHN DENTON: In Hong Kong especially, developments have often been built to the maximum of allowable gross floor area, so there is little opportunity to add value by building additional floor area. In this case the trick is to better use the existing floor area, either by replanning, creating greater leasable floor area, or possibly demolishing current floor area and rebuilding it in a place where it can be better used, and a greater leaseable area achieved.
TOM MILLER: You would tend to take a building that has been used as an office and ask how can you pretty it up, make it nicer; add sustainability aspects to make it more modern. You can do a lot of that with minimal need to get into the planning aspects and approval aspects, which take a lot of time. Tearing down, changing the use or changing the gross floor area all tend to blow out the approval periods in Hong Kong. One of the tougher things about a repositioning is that I find it more complicated than a new construction, which is easier to plan and implement. This repositioning stuff is very complicated and messy.
ALLAN LEE: Execution is the important part and in most cases, once its done, the people who do the repositioning say goodbye. But who’s going to lease it? Who will manage it? I think those people have to be involved in the early stage.
SHIRLEY LAM: We always look at the fundamentals first. We do a very deep review of markets and ask: ‘Is it feasible if we change the layout? Can we include more al fresco dining? Can we increase the leasable area?’ After we’ve done all the details from the leasing side, we work with the internal project team before engaging external consultants.
When considering a value-added project, what ‘hardware’ improvements can be made, ie remodelling entrances or lift enhancement? Which offer the best chance to add value and how?
CLAUDE TOUIKAN: We worked with Pamfleet and Morgan Stanley on Vicwood Plaza (now called lnfinitus Plaza) in Hong Kong. From day one, we remarked that you had to climb six metres of steps to get to the office lobby. We took those out and put in an escalator. Many basic things we changed; the connection from the MTR was added.
Repositioning is all about timing. If you get all the timing right, you’ve got it made. The timing was really right because it was bought during the SARS outbreak. Also Sheung Wan is changing from a lot of different aspects.
ALLAN LEE: When it comes to value-added projects, each one is different. You can’t have the same model. At the end of the project, I like to look back and say where did I go wrong? Should I do that again? You have to change your fashion and use modern elements.
JOHN DENTON: We always think, whether it’s a new project or a repositioning, what does this building or project want? We look at the demographics and that will tell us what it wants to be. It’s just like a new born baby, where the first thing you do is give it a name, which in turn helps to form its identity. Once the brand identity is dictated, the decisions on the look and feel fall into place quite easily.
TOM MILLER: If you’ve got a grade B office building that looks like it is a little bit down on its luck, it does not take a lot to add value. You improve the lobby, increase the speed of the lifts – a lot of the time they just need a bigger motor to get the speed up – and perhaps refresh the cab interiors. Also, improving the washrooms is a good way to add value. These improvements, along with improving the lift lobbies, will increase the value nicely.
CLAUDE TOUIKAN: There’s a demand for the lifestyle office. This is sort of a cross-over for younger people. They are looking for a more relaxed working environment. For example, co-working spaces.
You’ve all mentioned the importance of planning. But what’s the best way to make your repositioned project resilient to change. How can you best be flexible?
EDMOND YEW: Planning is not just building planning, project planning is very important too. For example, many younger people don’t want to be stuck in a high-rise office, such as on the 35th floor or in Pacific Place. They want to be closer to the action. Accessibility is very important as well.
SHIRLEY LAM: We take a very long-term view of the investment because we hold for the long term, we don’t sell. We model building performance over 20 years and try to see how we can maintain performance over that long period.
As a private equity investor, would you avoid having built-in redundancy that would increase flexibility later on in the life of the building?
TOM MILLER: We put in the state of the art equipment that we think we need to lease it right then. If we are leasing for the next year and a half, we put in what we think will be needed for that market. We can’t really plan for 10 years from now, because it won’t be ours and unless we see evidence that the rental market/capital markets will pay more for these future improvements, now, we just wouldn’t see the payback for these extra capital outlays.
JOHN DENTON: Sometimes it’s good not to squeeze too much; leave something on the table so that the buyer can add value.
What’s your view on the value of sustainability improvements?
EDMOND YEW: Malls in China are entering their third generation. Many are planned and will be built in coming years. The market is very competitive. We need to know how to position and increase the footfall for the mall and sustainability is part of that process.
JOHN DENTON: Developers are becoming more innovative in terms of their social responsibility. For example, the inclusion of art and making the building’s environment more family friendly. Twenty years ago, you wouldn’t find a seat in a mall and you’d see very little civic space. When we did Elements, we had many conversations about wanting to put seating in, and art, and we had many challenges. Luckily we won, and many other developments followed suit.
Repositioning can give you some easy wins. If the budget is small, what’s the first thing you do, in a mall for example?
EDMOND YEW: The question of how to rebrand is very important, as these malls carry a lot of history, some of it good, some not so good.
TOM MILLER: It’s also a question of how much flexibility you have with lease holders. If you are to reposition the whole thing and have lease holders that can be bought out, that’s great. But a lot time you can’t, because you have really long leases, or in some buildings, strata title ownership. If leases and strata title holders’ contracts preclude you from realising improved rental income or capital value, you’d tend not to do too much. We look at all the tenants and how long they have on the lease.
JOHN DENTON: It’s important for the architect to be creative as well as commercial and not just approach the project by the book. We need to remember that we design spaces for people, not mechanical/electrical plant, so we need to be creative in all disciplines.
JUSTIN WAI: There is a difference between easy and cheap, they do not amount to the same thing. We often make low-cost changes to a building that have a great impact on value. These changes may not be expensive, but often require detailed planning and an intimate understanding of the end-users’ needs.
How much of an opportunity is there to bring new life to buildings, such as Hong Kong’s Ginza-style malls that allow 24-hour shopping and dining?
ALLAN LEE: Its a huge opportunity. The new way of looking at the issue has helped create opportunities for buildings that would have struggled.
SHIRLEY LAM: There’s lots of examples in Hong Kong of new uses adding a lot of value to buildings. In Kowloon, an old building has been rebranded as an education tower and subleased to teaching facilities. The original use was an elderly home but it now has a new identity.