Shanghai, Singapore and Hong Kong offer the most attractive returns for investors seeking to boost the performance and returns of their aging office assets in Asia through minor building refurbishment, according to a new report from Arcadis, the leading global natural and built asset design and consultancy firm.
The Arcadis ‘Office Refurbishment in Global Cities’ report ranks 15 global cities by the expected net rental income return that can be generated from refurbishing office building stock that is at least 20 years old. Arcadis found that investors could expect the highest returns on capital expenditure (CAPEX) following a minor refurbishment in Madrid (9.6%). The top three cities in Asia are Shanghai (7.9%), Singapore (7.5%) and Hong Kong (7%).
Top Returns on Investment for Minor Building Refurbishment
1. Madrid 9.59%
2. London 8.46%
3. Shanghai 7.89%
4. Singapore 7.53%
5. Warsaw 7.47%
1. Minor building refurbishment aims to extend the life of the office asset by up to 5 years, whereas major building refurbishment aims to extend the life of the office asset by 15-20 years.
2. Return % = (Annual rental income after refurbishment – Annual rental income before refurbishment) / Total refurbishment development costs % .
William Taam, Executive Director and Asia Financial Institutions Sector Lead at Arcadis, said: “Office building refurbishment offers an excellent opportunity to improve the income and performance of an older office building in most financial city centre locations. There are many older office assets in Asia that have not received sufficient investment and which are now failing to realise their full potential. This is also the reason why Shanghai, Singapore and Hong Kong offer investors attractive returns for minor office building refurbishment.”
In addition, the report found that, with constant high demand for office space, Hong Kong also offers investors attractive returns for major office building refurbishment investments (5.2%), the only Asian city ranked in this category. Thus, Hong Kong has made it into the top ten for both minor and major office building refurbishment rankings.
William Taam continued: “Even though Asian cities such as Shanghai, Singapore and Hong Kong offer relatively high returns on CAPEX, they are also risky for investors. This is because there is high volume of new office supply coming into the markets. In order to stay ahead of the competition, investors need to ensure that the investments made are aligned to support occupier business and brand strategies. We are confident that more Asian cities will enter the rankings in the future as letting risk decreases.”
With European cities such as Madrid, London and Warsaw showing potentially attractive returns on office building refurbishment investment, it is not surprising that these cities have piqued the interest of Asian investors looking for opportunities outside their home region.
The report highlights that investment strategies can vary depending on the location of the office asset. In many cities, modern, accessible and new office space is being delivered in city quarters away from the established business districts, for example, Marina Bay in Singapore. If vacancy levels increase due to these new, competing areas, the report recommends investors focus on the protection of office asset revenue streams by taking a ‘defend’ building refurbishment strategy through minor building refurbishment, which will prevent the office buildings from becoming obsolete where there are relatively low tenant voids.
A full copy of the report can be downloaded here.