Santiago. Americas Research. Office Market, Year End Economic Overview

Transcription

1 Americas Research Santiago Office Market, Year End 2012 Economic Overview In a year with a glooming forecast for the world s largest economies mainly due to the euro zone debt crisis, 2012 s aftermath is of an incipient stabilization in Europe, the U.S. and China, and a year of noticeable performance for the Chilean economy. A high internal activity and a growing foreign direct investment seems to be the key drivers of this performance. In October, Chile obtained the lowest financing cost for a Latin American country as well as for an emerging country, with the emission of 10-year sovereign bonds at a 2.38% interest rate. As well, Standard & Poor s raised the country s long-term sovereign credit rating to AA- and AA+, and outlook to stable, similar to China s and Japan s ratings. GDP growth for 2012 was noticeably above the initial market s expectations. Overall performance in the most important economic sectors maintain dynamic and official estimations are of a 5.5% growth. The national census proved that Chile s population is lower than previous estimations (17.4 Mill. estimated, 16.5 Mill. according to the census), leading to a subsequent upwards correction in GDP per capita (-PPP) projection from the USD 17,974 forecasted by the IMF for 2012 closer to USD 18,500. This correction would make Chile the country with the highest GDP per capita in Latin America, surpassing Argentina and about to reach the USD 20,000 GDP per capita mark, a commonly accepted indicator to consider a country as a developed economy. A surprisingly low annual variation of the CPI was supported primarily by a decrease of imported good s prices and the strong appreciation of the Chilean peso. Inflation for 2012 was of 1.5%, below the Central Bank s objective of 3%. Unemployment rates maintained a slight descending tendency throughout the year and closed in 6.5%. These figures are near to a virtual full employment and contradicts most countries ascending trend in this indicator. Economic data Chile Country Population (Millions) 16,572 Santiago Population (Millions) 6,684 Unemployment Rate (%) 6.57 GDP (US$ Bn.) GDP per capita (US$) PPP Annual Inflation (%) 1.5 FDI (US$ Bn.) 26.4 Exchange Rate (Pesos per US$) (Dec. 12) Exchange Rate (Pesos per UF) 22, (Dec. 12) LATAM Business Index 18,5 Source: Central Bank of Chile, IMF. Data as of 2012 The Monetary Policy Rate (MPR) was held by the Central Bank at 5.0 throughout the year. Future variations on the MPR will depend primarily on domestic and foreign implications on inflation rates. The Chilean Peso was the fourth most appreciated currency worldwide, with a 8.4% value increase Y-o-Y along with the growth of foreign investment and solid domestic performance. Notwithstanding, the low price of the US Dollar is a concern for the exporting sector, and there is speculation about an intervention by the Central Bank if the USD drops below CLP 465. Foreign Direct Investment in 2012 reached USD 26,400 Million, breaking 2011 s record and surpassing Mexico s figures, positioning Chile second in FDI reception in Latin America after Brazil. Copper, Chile s largest export commodity and a significant portion of the national GDP, averaged US$ 3.60/lb. Annually. The stabilization of the Chinese economy among other key indicators are expected to rise copper prices to US$ in The country maintained the first position in the World Bank s Ease of Doing Business Ranking for Latin America (37th worldwide) and the Index of Economic Freedom (7th worldwide, followed by Uruguay and Peru, 29th and 42nd respectively), in recognition of Chile s open economic policies and investment-friendly commercial practices. A major concern to maintain the country s performance is the high cost of energy and the lack of power plants to support future demand. Energy costs for the industrial sector in Chile is one of the highest worldwide (more than 200% than the U.S. Mw/hour cost), and power scarcity could increase production costs for the mining industry, of which the country is largely dependent. Construction activity nation-wide exhibited consistent growth throughout the first half of the year and a stabilization towards the last quarter, along with a decrease in buildable land and a moderation of demand for construction related supplies. The increase of construction costs, high demand and the lack of land in some districts of Santiago and some other cities, led to an increase of prices in residential real estate, situation that has raised the attention of authorities and local industry.

2 Pulse Santiago Office Market Year End Market summary The volatility exhibited by the stock market as well as the increase of profitability in office rent investment in 2012 (Gross Cap. Rates averaging 8.5% for Class A and 9.5% for Class AB) were the drivers of large developments and transactions in the Santiago office market. The largest single transaction ever recorded took place in December, with the sale of 5 office buildings between a German fund and a local investment company for USD 215 million. As well, several buildings in different submarkets were acquired by large investment groups, even before the initiation of their construction. The constant arrival of multinational companies in the recent years and their demand for corporate-standard real estate has brought sophistication to the market in terms of commercial practices, technology standards and sustainability. A large percent of office developments are designed to obtain the Green Building Council s LEED certification, which is more frequently a determining factor in the preliminary stages of their design. Currently, close to 100 buildings (Class A and AB) in Santiago are already certified or in the process of obtaining the certification. Year-End Market Scenario The office market local stock at year-end consists of approximately 2,777,000 square meters, which makes Santiago the third largest office market in Latin America, after Mexico City and Sao Paulo. This is noticeable considering Santiago has nearly one fourth of these cities population and less population than cities that follow Santiago in terms of stock (Bogotá, Río de Janeiro and Buenos Aires). Submarket Breakdown - Class A & AB Submarket Area (m²) Weight Huechuraba ,8% Las Condes ,5% Providencia ,9% Santiago Centro ,5% Vitacura ,3% Total % Source: Jones Lang LaSalle The total production in 2012 was of approximately 168,500 Class A and AB square meters, very similar to 2011 s figures and lower than initial expectations, mostly due to the delay in the delivery of some large projects (i.e., Cerro El Plomo 6000, City Park I & II, among others), which are expected to enter the market in H Additional 20,000 square meters were reintegrated to the stock, corresponding to some buildings of the Patio Mayor complex in Huechuraba that were declared inhabitable after 2010 s earthquake and went through extensive repairs. Class A product was provided by four buildings: Titanium Park III (entirely preleased by national telecom company Entel), Deloitte Building (preleased almost entirely by Deloitte), Territoria El Bosque and Huerfanos Tower, the last being the only Class A building not delivered in Las Condes submarket. Total Class A production was close to 85,500 square meters. Class AB deliveries took place throughout the different submarkets but more noticeably in Huechuraba and Providencia submarkets. Total Class AB production was of approximately square meters. General market vacancy throughout the year was close to 2.0. The substantial amount of deliveries that took place in the last four weeks increased the general vacancy levels to 3.7%. Class A increased from close to 1% in mid-year to 3.0%, concentrated mostly between two buildings, both delivered in December (Territoria El Bosque and Huérfanos Tower). Regarding Class AB, levels are close to 4.3%, mostly provided by the Huechuraba submarket, which main sector s vacancy, Ciudad Empresarial, is close to 15%. Annual absorption was of approximately 135,500 square meters, around 10% below the last five year s average. This decrease could be attributed to the large percentage of production being delivered in the few last weeks of the year, even though a considerable amount of the absorption was represented by preleased office space, an increasingly common practice in the market and more extended in Class A projects by large national and multinational companies. al rates overall remained stable throughout the year, with some non-representative exceptions in sectors mostly comprised of Class A buildings with vacancies close to zero, i.e., El Golf. Class A rents range from USD 25 to USD 34, averaging USD 28 per square meter per month and expected to maintain current values in the next months as new supply is expected to be delivered constantly. Class A average sale prices are close to USD 3,600 per square meter. Class AB rents range from USD 17 to USD 25, averaging USD 22 per square meter per month. Sale prices in this category average USD 3,120 per square meter. al rates in Chile are expressed in Unidades de Fomento (UF)*. The above chart represents rental rates converted to US dollars, which have experienced a continuous ascending trend caused largely by the strong appreciation of the Chilean Peso in the last years, and not to an actual increase of rental rates. *The Unidad de Fomento (UF) is an inflation adjusted quasi-currency quoted daily by the Central Bank of Chile according to the local CPI.

3 Pulse Santiago Office Market Year End Main Indicators Market expansion Trend (next 12 months) Class A (US$/m²/mo) Class AB (US$/m²/mo) Service Charges (US$/m²/mo) Total Costs Class A (US$/m²/mo) Total Costs Class AB (US$/m²/mo) Class A & AB Stock (sq. m.) 2,606,000 2,777,000 Vacancy (sq. m.) 53, Current Vacancy Rate (%) 2.0% 3.7% 2013 Future Supply (sq. m.) 460,000 Source: Jones Lang LaSalle The consistent demand and the lack of available land in consolidated areas has driven the rise of new office sectors, each with different characteristics and product conceived for different types of occupiers. As an example, the Providencia submarket has seen in the recent years the consolidation of the North Corridor (Andrés Bello Avenue), mostly comprised of high-standard Class AB buildings in a location with great connectivity, at walking distance from public transport and close to several amenities. Santiago is positioned around 11:00, seemingly approaching the end of the rental rate escalation period, after recovering from its cyclical low vacancy driven by a considerably strong demand, which spurred an unseen development of office buildings. This large foreseen production could take Santiago closer to a period of vacancy rates approaching equilibrium and subsequently, a moderate decrease of rental rates. Outlook for 2013 Forecasted for 2013 is the highest annual production ever recorded for the Santiago office market, with close to 460,000 Class A and AB square meters projected for delivery, which could take vacancy levels over 7% towards the last quarters of the year. More than half of this production is comprised of Class A projects, most of them under construction in the Las Condes submarket. Class AB buildings will be delivered throughout all Santiago but more noticeably in the Huechuraba submarket. A moderate descending trend in rental rates could initiate in some submarkets after the first half of the year as vacancy rates escalate. This, more likely to happen in Class AB buildings as current vacancy rates are higher than in Class A and fullbuilding prelease is a less extended practice for this segment. Santiago Map of Submarkets The Escuela Militar / Apoquindo corridor is expected to consolidate in the next two years along with the delivery of several Class A projects, some of which are already preleased. This corridor emerged mainly due to the lack of land in El Golf and Nueva Las Condes sectors, and will connect both areas along Apoquindo Avenue. Office Market Clock: Latin America The Office Market Clock is an indicator elaborated by Jones Lang LaSalle, which allows classifying the markets cycles according to their positions. This is the LATAM Office Market Clock as of Q

4 Pulse Santiago Office Market Year End Typical Leasing Practices Standard Unit of Measurement Unit of Measurement Square Meters (m 2 ) Lease Contracts All real estate transactions in Chile are executed in Unidades de Fomento (UF) Typical Lease Term 3-5 years Frequency of Payment Monthly Deposit Case-by-case basis (Typically 1-3 (expressed as per month rent) months rent typical) Security of Tenure Statutory Right to Renew Basis of Increases or Review Frequency of Increases or Review Only for the duration of the tenancy. No guarantee beyond the original lease term No (unless an option to renew is agreed at the outset and specified in the lease) In UF, indexed daily According to contract Transaction Fees 4% of total value of lease for the first period (if both parties have representatives, agency fees split 50/50) Landlord / Tenant (payable by Landlord / Tenant) Legal Fees Each part responsible for its own (payable by Landlord / Tenant) legal costs Incentives Free Period Case-by-case basis, 1-3 months The rent free period is not standardized in the local market, however typically occurs. The length of this period is negotiated between the parties and is also a factor of how much (if any) tenant improvement allowance is provided. Ease of Doing Business (Ranked out of LatAm 32 Countries) 1=Easiest/32=Hardest. Ranking as of June Ease of Doing Business 1 Starting a Business 4 Dealing with Construction Permits 17 Getting Electricity 12 Registering Property 5 Getting Credit 7 Protecting Investors 5 Service Charges, Repairs and Insurance Service Charges/Managements Additional to the rental charge and Fees payable monthly in advance Utilities (Sometimes separately Electricity, telephone, AC, etc. paid metered, sometimes paid as a by tenant according to consumption percentage of occupation) Car Parking Separate from lease contract, generally UF /unit /month (US$ ) Internal (Tenant Space) Tenant Common Areas Landlord (charged back via service (reception, lift, stairs, etc.) charge) External / Structural Landlord Landlord (charged back via service Building Insurance charge) Taxes Stamp Duty 50% / 50% Building Insurance Local Property Taxes VAT on & Service Charge (Payable by Tenant) Sub-Letting & Assignment Early Termination Tenant's Building Reinstatement Responsibilities at Lease End Land Title Foreign Ownership Strata Title (Partial ownership of the building) Security Deposit Landlord Disposal of Leases Landlord, annually (charged back via rental rate) 19.0% - standard VAT in Chile Usually Yes (subject to landlord s approval) Unless otherwise stipulated in the lease, tenant is responsible for paying the entirety of the contractual obligation Original condition, broom clean condition negotiable Purchasing Properties Mainly freehold No restrictions Strata title ownership is quite common Case-by-case 4% paid by the Buyer. If the owner has representation, separate commission is negotiated between the Owner and its broker Legal Fees Each part responsible for its own legal costs Stamp Duty 50% / 50% Other Transaction Costs Typically paid by Buyer Paying Taxes 1 Trading Across Borders 5 Enforcing Contracts 3 Resolving Insolvency 15

5 Pulse Santiago Office Market Year End Glossary of Terms Class A Range Class AB Range Represents the top range of open market rent that could be expected for a top quality office unit in a preferred location, as of the survey date (normally at the end of each quarter period). The rent quoted normally reflects prime units of over 200 m² of rentable floor space, which excludes rents that represent a premium paid for a small quantity of space. The Class A Range reflects an occupational lease that is standard for the local market. It is a face rent that does not reflect the financial impact of tenant incentives and excludes service charges and local taxes. It excludes any unrepresentative deals. Represents the range of open market rent that could be expected for a medium-to-high quality office unit in a good location as of the survey date (normally at the end of each quarter period). The rent quoted normally reflects prime units of over 200 m² of rentable floor space, which excludes rents that represent a premium paid for a small quantity of space. The Class AB Range reflects an occupational lease that is standard for the local market. It is a face rent that does not reflect the financial impact of tenant incentives and excludes service charges and local taxes. It excludes any unrepresentative deals. For further information on any prospective client requirements, please contact Felipe Acevedo. For further information on market research, please contact Aliro Franco. Contact Jones Lang LaSalle 3000 Isidora Goyenechea Ave., 22 nd floor Las Condes district Santiago Chile Tel chile@am.jll.com Vacancy Rate Stock The Vacancy rate represents an approximate amount of immediately vacant office floor space in all completed buildings within a market as of the survey date (normally at the end of each quarterly period), expressed as a percentage of the total stock. The stock is an approximate number of total quality spaces in a given market suitable for large multinational tenants. Depending on the market, its specific characteristics and dynamics, properties of differing quality may or may not be included in the stock.