Americas Research Santiago Office Market, Year-End 2013 Economic Overview The global economy exhibited signs of performance improvement during the second semester of 2013, explained mostly by the recovering economic activity in developed economies such as the US and Japan, as well as the undergoing stabilization of the Euro zone after years of economic stagnation. Growth in Latin America suffered from the fall of commodity prices and struggling export prices, but improved slightly as well in the second semester as commercial partners resumed activity. As for the Chilean economy, despite the strong labor market, consumer demand and bank lending, performance took an anticipated decrease during 2013. Annual GDP growth was of 4.0% down from an over 5% expansion in the previous three years. The slowdown was mainly influenced by foreign investment migration to recovering economies and a lower overall investment in the last months of the year. Furthermore, the Chilean Central Bank s GDP growth forecast for 2014 is between a 3.75% - 4.75% range. Seemingly, private forecasts point toward a near 4% growth. Chile maintained its position as the country with the highest GDP per capita (-PPP) in Latin America, with an estimated USD 18,945 result, followed closely by Argentina (USD 18,582) and Uruguay (USD 16,588). Inflation rate Y-o-Y settled at 3%, right in the middle of the Central Bank s target range (2% - 4%). The low inflation and moderation of growth led the Central Bank to apply two 25-point cuts to the monetary policy rate (MPR) in the last quarter, which dropped from 5% to 4.5%. According to private analysts, further reductions in the MPR could be implemented in the first months of 2014. Unemployment exhibited a 0.4% decrease Y-o-Y to a 5.7% rate, the lowest in 15 years. Job creation was a determinant factor on these figures, being the retail, real estate and education sectors the higher providers of payroll employment.. Economic data Chile Country Population (Millions) 17.556 (est.) Santiago Population (Millions) 6.061 (est.) Unemployment Rate (%) 5.7 GDP (USD Bn.) 281.236 GDP per capita (USD) PPP 18.945 Annual Inflation (%) 3.0 FDI (USD Bn.) 20.4 Exchange Rate (Pesos per USD) 523.76 (Dec. 13) Exchange Rate (Pesos per UF) 23,306.56 (Dec. 13) LATAM Business Index 1 Source: Central Bank of Chile, National Statistic Institute (INE), IMF. Data as of 2013 As mentioned before, foreign direct investment (FDI) declined approximately 33% Y-o-Y, after 3 years of record-breaking figures. Apart from the return of capital to recovering countries, this sharp downturn was caused by the drop in commodity prices, with a subsequent lower investment and reinvestment of earnings. Chile showed an annual surplus of USD 2.4 billion in trade goods, exporting USD 77.4 billion while maintaining imports approximately in USD 75 billion. Copper, the country s main export commodity decreased its total sales in 4% (to USD 40,509 million) mainly due to China s GDP adjustments and a lower international price. The international price of this mineral averaged USD 3.32/lb., showing a consistent drop since 2011 (USD 4.00/lb.) and 2012 (USD 3.61/lb.). Thus, mining exports revenues dropped slightly in relation to 2012, totalizing USD 44.3 billion (USD 2.2 billion less than 2012). The lower international price of copper and other commodities (on which Chile relies strongly) and the aforementioned cuts in the MPR induced the Chilean Peso (CLP) to depreciate nearly 10% against the dollar, starting the year at CLP 480 = 1 USD and closing in December in CLP 525 = 1 USD. Michelle Bachelet, Nueva Mayoría s presidential candidate (political alliance formed by left-wing parties) won the elections in December and will return to office after her 2006 2010 presidential period and Sebastián Piñera s right-wing government (2010 2014). This coalition has based its program in introducing profound social improvements, such as major changes in free education for the lower income population, higher taxation for companies and amendments to the Constitution. Regarding construction activity, this industry exhibited a slowdown in all indicators when compared to 2012, mainly due to a moderation in demand for workforce and construction supplies. Requests for construction permits decreased as well. The industry s forecast for 2014 is of a lower performance, based on a moderation in investment for infrastructure, mining and residential projects.
Pulse Santiago Office Market Year-End 2013 2 Market Summary Following the remarkable performance exhibited in the recent years, 2013 was a year of solid growth and evolution for the Santiago office market. Demand for high-standard real estate has sophisticated the market in terms of technical specifications, efficiency, sustainability (LEED certification being a determining factor for construction), implementation of international safety standards and commercial practices, among others. As the market becomes more mature, submarkets and within the submarkets, sectors tend to differentiate from each other while internally homogenizing their profile, developers, users and prices. Close to 42,000 sq. m. of take up were represented by fully preleased corporate buildings. Notwithstanding initial forecasts pointed toward a higher annual absorption (+250,000 sq. m.), the delay in the construction of some preleased projects diminished supply and absorption figures as well. Year-End Market Scenario Throughout 2013 was delivered one of the highest annual production for this market, adding almost 200,000 sq. m. in Class A and AB space, increasing the total market s stock in nearly 7%. With a resulting total stock of 2,879,045 sq. m., Santiago remains the third largest office market in LatAm, after Mexico City and Sao Paulo. Class A production represented close to three quarters of the new supply and was mostly concentrated in Las Condes submarket, which represents more than 50% of the corporate market as well as almost 85% of the Class A stock. Some noticeable deliveries were Nueva Apoquindo I and III buildings (the latter fully leased by insurance company Sura) as well as Titanium Park Tower B, part of a prime three-building project, which was almost completely absorbed within 6 months of entering the market. Class AB deliveries (app. 55,000 sq. m.) took place throughout the market, but more intensively in Huechuraba submarket. Two Class AB buildings (both located in Santiago Centro submarket) were fully leased by governmental entities. Submarket Breakdown - Class A & AB Submarket Area (m²) Weight Huechuraba 259.554 9,0% Las Condes 1.579.052 54,8% Providencia 435.510 15,1% Santiago Centro 482.253 16,8% Vitacura 122.676 4,3% Total 2.879.045 100% Source: Jones Lang LaSalle New supply augmented the general market vacancy throughout the year, from 3.7% up to 5.2% at year-end. The significant Class A delivered supply (app. 144,000 sq. m.) raised this segment s vacancy (5.8%) over Class AB s (4.6%) for the first time in many years, regardless of the larger demand for Class A space. Regarding submarkets, vacancy has maintained relatively stable in Huechuraba (16.8%), Providencia (3.2%) and Vitacura (5.2%), while it has decreased consistently in Santiago Centro (from 4.3% to 2.2%) and increased in Las Condes (from 1.6% to 4.8%, due to the high supply). Nevertheless, vacancy remains in near 1% levels in exclusive sectors, such as El Golf. Annual absorption was close to 155,000 sq. m., mostly concentrated in the Class A segment (app. 100,000 sq. m.), as usual in this market. Rental rates in Unidades de Fomento (UF, an inflation adjusted quasi-currency in which all real estate transactions in Chile are executed) continued the market s moderate but continuous ascending trend throughout the year, escalating from UF 0.62 /sq. m. to UF 0.63 /sq. m. for Class A and from UF 0.46 /sq. m. to UF 0.47 /sq. m. for Class AB. On the other hand, the near 10% depreciation of the Chilean Peso (Y-o-Y) maintained rents in USD, Class A rents settling at USD 28 /sq. m. and Class AB rents at USD 21 /sq. m. in year-end. Main Indicators 2012 2013 Trend (next 12 months) Class A Rent (USD/m²/mo) 25-34 18 33** Class AB Rent (USD/m²/mo) 17-25 15-29 Service Charges (USD/m²/mo) 3-5 3-5 Total Costs Class A (USD/m²/mo) 28-39 28-39 Total Costs Class AB (USD/m²/mo) 20-30 20-30 Class A & AB Stock (sq. m.) 2,777,000 2,879,045 Vacancy (sq. m.) 103,000 148,775 Current Vacancy Rate (%) 3.7% 5.2% 2014 Future Supply (sq. m.) 300,000 Source: Jones Lang LaSalle *For more information on the Unidad de Fomento and its calculation visit: www.bcentral.cl ** This decrease is due to new supply in Santiago Centro, which posts lower asking rents
Pulse Santiago Office Market Year-End 2013 3 Market Expansion Scarce land availability in consolidated sectors is pushing the market to expand toward new locations. The consolidation of Escuela Militar / Apoquindo corridor is a good example of the expansion of Las Condes submarket in the recent years. As well, some new developments are taking place in Corredor Sur (Providencia submarket) after years of stagnation. Additionally, the new Citypark Santiago sector in Huechuraba will aggregate 9 office buildings as part of a planned development project. Emerging Sectors Additionally, new office poles are in gestation, located primarily within high-income residential neighborhoods, i.e., La Dehesa, Estoril, Las Condes and Los Dominicos avenues. These sectors are mostly focused in providing locally-based professional services provided by small companies. Thus, the majority of the projects in these sectors are considered Class C developments (offices between 20 200 sq. m.). Nevertheless, it is important to notice that growth plans for some of these poles in the mid-term could consolidate them into full-scale office sectors and attract larger occupiers. Capital Markets Activity has flourished in capital markets as many local and international investment funds and investors have deployed in the market. It is estimated that close to 180 USD MM were transacted throughout the year, for over 38,000 sq. m. of Class A space. As well, transactions for more than USD MM 135 were celebrated for the acquisition of nearly 50,000 sq. m. of Class AB space. These figures only consider transactions for over 5,000 sq. m. The development in capital markets has induced a transformation in ownership structure, from a largely strata-title market toward single ownership, particularly in the prime segment. Single landlordship is particularly relevant to assure building s conservation over time, brings uniformity to commercial practices and is critical to attract tenants requiring large areas. The increasing vacancy, the forecasted high production in the midterm as well as macroeconomic indicators pointing toward a moderation in growth, among others, explain the transition of the local market s clock position, advancing from 11:00 to 12:00. Outlook for 2014 2014 promises to be a very dynamic year for the Santiago office market. Production is forecasted to be close to 300,000 sq. m., more than 10% of the total stock. On account of this remarkable production it is expected that vacancy could rise gradually and settle between 8% 9% at year-end, reaching the highest levels in 10 years, near equilibrium levels. This scenario could balance the market, after an extended period of pro-landlord conditions, and provide fair market conditions for both landlords and tenants. Although Class A production has shown a larger expansion in the past, forecasts point toward a higher supply in the Class AB segment. Regardless of these forecasts, rental rates in UF are expected to maintain in prime office sectors and only descend slightly (if at all) in some of the largely Class AB submarkets such as Santiago Centro and Huechuraba. In addition, rental rates in USD could be affected by further fluctuations in the USD / UF exchange rate. Santiago Map of Submarkets 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 Clock as of Year-End 2013.
Pulse Santiago Office Market Year-End 2013 4 Definitions Class A: We consider Class A buildings to be all buildings which comply with at least three of the following four conditions: (1) preferential location; (2) large floor plates; (3) top building quality (technology, fittings, etc.) and; (4) Class A Feeling (excellent or very good image). Class AB: The Class AB segment could be defined by buildings that due to its relatively deficient location, size of the floors or antiquity (among other aspects) cannot be considered as Class A; but which, however, do compete for the international and local corporate user market. Typical Leasing Practices Standard Unit of Measurement Unit of Measurement Square Meters (sq. m.) Lease Contracts Rent All real estate transactions in Chile are executed in Unidades de Fomento (UF) Typical Lease Term 3-5 years Frequency of Rent Payment Monthly Guarantee Deposit Case-by-case basis (Typically 1-3 (expressed as per month rent) months rent) Security of Tenure Statutory Right to Renew Basis of Rent Increases or Rent Review Frequency of Rent Increases or Rent 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 Rent Free Period Incentives Case-by-case basis, 1-3 months The rent free period is increasingly a standard in the local market. 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. 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 2.8-4.5 /unit /month (USD 125 200 /unit /month) 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 Rent & Service Charge (Payable by Tenant) Landlord Landlord, annually (charged back via rental rate) 19.0% - standard VAT in Chile Disposal of Leases Sub-Letting & Assignment Usually Yes (subject to landlord s approval) Early Termination Unless otherwise stipulated in the lease, tenant is responsible for paying the entirety of the contractual obligation Tenant's Building Reinstatement Original condition, broom clean Responsibilities at Lease End condition negotiable Land Title Foreign Ownership Strata Title (Partial ownership of the building) Security Deposit Purchasing Properties Mainly freehold No restrictions New buildings are typically owned by a single landlord. Strata title ownership is common for older buildings 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
Pulse Santiago Office Market Year-End 2013 5 About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4.0 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 3.0 billion square feet. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit www.jll.com. About Jones Lang LaSalle Research Jones Lang LaSalle s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our 350 professional researchers track and analyze economic and property trends and forecast future conditions in over 70 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, create a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. 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 Santiago, Chile Tel. +562 2374 0070 chile@am.jll.com www.joneslanglasalle.com/latinamerica