Occupier Insight: Navigating Emerging Markets

Occupier Insight Navigating EMERGING Markets A Corporate Occupier & Investor Services Publication

2013

Navigating EMERGING Markets

INTRODUCTION The potential for slow economic growth is expected to hamper expansion in North America and the euro zone. As a result, multinationals are consistently turning to emerging markets in search of revenue. Rapidly growing populations, an increasingly educated workforce, expanding middle-class incomes, and substantial foreign and domestic investment are all compelling arguments for corporate expansion in these markets.

In our latest Occupier Insight Report, we discuss the risks associated with occupancy and expansion in emerging economies. This report identifies 43 countries across Latin America, Africa, the Middle East, and Asia Pacific where global companies are contemplating expansion. In this piece, we discuss the key considerations for multinationals when assessing a market’s suitability for occupancy, identify the economic indicators that should be assessed in determining risk, and examine the current state and prospects of the property market.

We hope you find this information useful and informative. Please do not hesitate to contact Cushman & Wakefield’s Global Occupier Services leadership, or the authors of this report should you require a deeper assessment of the trends discussed in the piece.

John C. Santora

President and CEO Corporate Occupier & Investor Services

Michael Creamer

EMEA Head of Occupier Services

Richard Middleton APAC Head of Occupier Services

Mark T. Wanic

Americas Head of Occupier Services

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Economic Perspective Emerging AND BRIC Markets are a Force in the Global Economy Ken McCarthy, Chief Economist, Cushman & Wakefield Over the past two decades emerging markets have become an increasingly important part of the global economy, first as manufacturing locations for global corporations that sought to outsource

Emerging and Developing Nations’ Exports as a Percent of World Exports 40.7%

40%

39.1%

production to reduce costs, and now as markets for goods in their own right as incomes have

36.6%

35%

33.0%

increased and a middle class has emerged in many of these countries.

33.9%

37.4% 35.3%

31.1%

30%

28.4% 26.7%

For the past 22 years, a group of 54 nations

25%

identified by Oxford Economics as Emerging Markets and including countries like the BRIC economies (Brazil, Russia, India, China) as well

20%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Sources: World Trade Organization, International Monetary Fund

as developing economies like Bangladesh, Egypt, Namibia, Jamaica and Vietnam to name just a few, has grown much more rapidly than the rest of the world. Since 1990, GDP in these emerging markets as a group has grown at an average annual rate of 9.9% while the rest of the world has grown at less than half that pace or roughly 4.2% per year. In 1990 the GDP of China, arguably the world’s first and leading emerging market economy, was roughly $388 billion and represented approximately 1.7% of global GDP. Today China has the second largest economy in the world and accounts for about 11.5% of global GDP. As a result, emerging markets now account for almost 35% of global GDP and are a potent factor in the global economy that can no longer be ignored.

Trade with these nations has also grown rapidly. Their impact on the global economy can be seen in the growing share of global trade in goods that these countries represent. According to the IMF, exports from emerging and developing nations have grown at a compound annual rate of 15.5% since 2003, more than twice the rate of the rest of the world. As a result, today these nations account for approximately 44.5% of total world exports. In 2003 these nations accounted for only 26.7% of world exports. This increasing share of global trade means these nations are becoming more and more integrated into the global economy.

Over the next several years, as the global economy becomes ever more integrated, corporations will need to be in more locations than ever. Any business that ignores emerging markets will be missing out on the fastest growing part of the global economy.

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Assessing the RISKS OF CORPORATE EXPANSION Given the juxtaposition of significant GDP growth and the high levels of instability and risk in many foreign markets, corporations must weigh a variety of risks to determine the suitability of each market. Below are some of the key issues that any real estate department must consider when analyzing location opportunities.

impact on total occupancy costs Given the limited supply of already built property, as well as the lack of infrastructure in many remote markets to support new construction, rental rates for multinationals will be high relative to their total portfolio. Some of the world’s highest rents can be found in São Paulo, Rio de Janeiro, Luanda, and Abuja, where prime rental rates can top long-established and mature markets such as New York, London, Paris and Tokyo. For real estate departments trying to control expenses across their portfolios, the impact of the occupancy cost in these markets to their broader portfolio should be examined.

quality of ownership In many of these markets, it can be challenging to find property owners with the professional experience, knowledge, and financial capital to serve the modern corporation. While REITs, private equity investors, and other institutional owners have been investing in many of these markets for some time, the percent of stock these organizations own and operate remains small in relation to the broader inventory. In the more established growth markets, finding professional ownership is less of a challenge. In many countries, ownership is held by families or individuals and can be multi generational, making it challenging to negotiate leases and building improvements.

Transparency of property rights AND LAND USE In some countries, corporations are not legally allowed to own real estate. In others, owners have the right to negotiate rental rates annually over the course of a lease term. Knowing up-front the legal framework for how the corporation is allowed to acquire and operate real estate is essential.

In many emerging markets, it can be challenging to find property owners with the experience, knowledge and capital to construct office buildings that meet the needs of today’s corporations.

Investment in infrastructure Assessing the state of the broader infrastructure is critical. In established markets the quality of the infrastructure can be excellent, and in some cases even better than domestic markets. In others, there can be issues with such basic things as roads, schools, hospitals, and the banking system. Corporations need to know if there is adequate law enforcement, government spending and legal protection and they should ask such basic questions as how will employees live and travel to and from work? The state of the infrastructure determines how easy it will be to conduct daily business operations.

Health & safety of employees From basic issues such as securing clean water and efficient energy, to complying with western and/ or corporate standards for materials, fire, safety, and security, multinationals can be challenged to find facilities that provide acceptable work environments for their employees. Many corporations have additional requirements related to social responsibility and sustainability, further increasing costs and limiting the amount of available stock.

Level of corruption Corruption makes it hard for corporations to operate and for economies to fully develop. It stifles trade, investment, and economic development. From bribery, to taxation and the threat of government overthrow, corruption can be a significant issue in some markets. The more mature markets, such as China, India, and Saudi Arabia have made significant progress in reducing their levels of corruption. In other markets, such as Sudan, Myanmar, Zimbabwe, Mexico, and Venezuela, corruption makes it extremely difficult to operate a business with any level of assurance.

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Country overviews As corporations explore new markets, an understanding of risk must weigh into their expansion strategies. We have identified a number of issues – from the level of corruption, to the quality of infrastructure, transparency of property rights, and class of ownership – that should be considered.

As real estate departments support corporate expansion priorities, they face a daunting task in helping make sense of these risks and opportunities.

In the following sections of this report, we provide an overview of the key economic indicators, risk rankings and property markets for the 43 countries noted below.

The global map below is interactive. By clicking on a specific region, you will be led to an overview of the key trends for that region, followed by a region map. On the map, click on each country to receive a detailed description of the criteria best used to determine the suitability of that country for corporate expansion.

INTERACTIVE GLOBAL MAP WITH HIGHLIGHTED REGIONS

CENTRAL & SOUTH AMERICA (7)

Argentina Brazil Chile Colombia Mexico Peru Venezuela

AFRICA & MIDDLE EAST (25)

Algeria Angola Botswana Cote D’Ivoire Democratic Republic of Congo Egypt Ghana Kenya

Libya Morocco Nigeria Senegal South Africa Tanzania Tunisia Uganda Zambia

ASIA PACIFIC (11)

Zimbabwe Bahrain Jordan Lebanon Oman Qatar Saudi Arabia UAE

China India Indonesia Philippines Thailand Vietnam Bangladesh Cambodia Mongolia Myanmar Sri Lanka CUSHMAN & WAKEFIELD

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Navigating EMERGING Markets

LATIN AMERICA Quantifying risk and opportunity across Latin America (LATAM) depends on the country and market of interest. Cities such as Rio de Janeiro, Buenos Aires, and São Paulo have made significant progress over the last decade in improving the quality of their infrastructure, which in turn has attracted significant foreign capital to the real estate sector and put them on the list of top markets for office demand. Parts of these cities remain underserved by utilities and the quality of commercial construction can vary from building to building, even within the same submarket. Outside these markets, the political, infrastructure, and economic risks for corporate occupancy vary dramatically.

Below is a ranking of the key LATAM countries covered in this report according to their GDP growth from 2011 to 2012.

ECONOMIC GROWTH – LATAM Country Ranking per YOY Change in Real GDP No. Country

% Change in GDP

1.

PERU

6.3

2.

VENEZUELA

5.6

3.

CHILE

5.5

4.

COLOMBIA

4.0

5.

MEXICO

3.9

6.

ARGENTINA

1.9

7.

BRAZIL

0.9

Source: Oxford Economics, 2012

The issue most affecting markets in Latin America over the next five years will be the completion of the $5.2 billion Panama Canal project.

Property Market Trends While Brazil continues to be one of the most sought-after countries in LATAM, the nation’s recent economic slowdown and political turmoil is expected to negatively impact demand in the commercial office market. New office inventory delivered across Brazil’s major cities in 2013 will exceed 2011 and 2012 levels combined. The major markets of Rio de Janeiro and São Paulo have already seen a pullback in corporate leasing activity and the market is expected to struggle over the next few years to fill the new inventory scheduled to come on-line, which at this point stands at only 30% pre-leased. That being said, these markets are not expected to cede ground as the leaders in LATAM. Peru is experiencing a significant increase in occupier interest. The country ranks as one of the most business friendly global markets. According to The World Bank’s Ease of Doing Business Ranking (EODB), Peru ranks 43 out of 185 and is near the top of C&W’s list in this report (Thailand has the highest EODB ranking with 18/185). The long-term prospects for Peru are positive and the country is expected to achieve GDP growth of 6.5% in 2013, on top of the 6.3% it generated in 2012. Although small, Colombia’s recent strong economic performance has driven occupiers to this market over the last 12 months and C&W puts Colombia second to Peru in its growth prospects for occupiers in LATAM. Overview continued on the following page…

REGION MAP GLOBAL MAP

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Navigating EMERGING Markets

In contrast, Venezuela is one of the most challenging markets globally to conduct business. The World Bank gives it an EODB ranking of 180 out of 185. Despite its vast oil reserves and the recent death of Hugo Chavez, Venezuela is expected to remain challenging for corporate location. The country recently de-valued its currency, which has eroded middle-class income and further decreased the purchasing power of consumers.

Below is a ranking of the key LATAM cities in this report according to rental rates.

PRIME OFFICE RENT No. City

Country

Prime Rental Rate

Trend

1.

RIO DE JANIERO

Brazil

65

Stable

2.

SÃO PAULO

Brazil

61

Stable

3.

CARACAS

Venezuela

46

Stable

4.

BOGOTÁ

Colombia

34

Stable

5.

BUENOS AIRES

Argentina

29

Stable

6.

MEXICO CITY

Mexico

30

Stable

7.

SANTIAGO

Chile

26

Stable

8.

LIMA

Peru

19

Accelerating

9.

QUITO

Ecuador

15

Accelerating

Source: Cushman & Wakefield, Rent quoted as asking rent USD/sq. m/month

Perhaps the issue that will most affect LATAM in the next five years will be the expansion of the Panama Canal. While Central American markets did not make C&W’s list this year, due to only marginal interest from corporations for office space, the Panama Canal project will likely change this. The $5.2 billion infrastructure project is scheduled to be completed by 2015 and will allow ships that hold up to 13,000 twenty-foot containers to pass more quickly from east to west and strengthen the already growing trade relationship between LATAM and China. Corporations should take this project and its potential affect on the region into account when assessing location opportunities in LATAM.

REGION MAP GLOBAL MAP

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AFRICA & the MIDDLE EAST The past five to ten years have seen the emerging markets of Africa and the Middle East (AME) come to the fore in terms of future development and interest. While many of these markets have already seen a wave of multinational corporations establish a presence in recent years, the progression of infrastructure and transparency improvements have further opened up these countries to receiving new business.

Occupancy risks within parts of AME are arguably higher than in any other part of the world.

A number of countries suffer from high levels of corruption, poor security, inadequate infrastructure and a lack of transparency. While these issues pose important and restrictive barriers to entry, how AME develops over the next five years will be a critical factor in shaping global economic growth. As can be seen from the chart below, a majority of these nations are growing economically, despite their risks. The key for multinationals will be how to harness the opportunities that exist in the region, while simultaneously protecting the business from downside risk.

Below is a ranking of the key AME countries covered in this report according to their GDP growth from 2011 to 2012.

ECONOMIC GROWTH – AME No. Country

% Change in GDP

No. Country

% Change in GDP

8.1

13. ZIMBABWE

4.5 4.3

1.

COTE D’IVOIRE

2.

ANGOLA

8.0

14.

3.

ZAMBIA

7.3

15. TUNISIA

4.1

4.

DEM REP OF CONGO

7.2

16.

SENEGAL

3.4

KENYA

5.

GHANA

7.1

17.

BAHRAIN

3.4

6.

SAUDI ARABIA

6.8

18.

UNITED ARAB EMIRATES

3.3

7

TANZANIA

6.6

19.

MOROCCO

2.7

8.

NIGERIA

6.5

20. JORDAN

2.7

9.

BOTSWANA

6.1

21. ALGERIA

2.5

10

QATAR

6.0

22. SOUTH AFRICA

2.5

11.

OMAN

5.5

23. EGYPT

2.2

12.

UGANDA

4.5

24. LEBANON

1.0

The risks of locating in markets across Africa and the Middle East are greater than in any other part of the world.

However, the potential business opportunities are equally as great.

Source: Oxford Economics, 2012

Overview continued on the following page…

REGION MAP GLOBAL MAP

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Property Market Trends There is a discernible difference between the office locations of Africa and the Middle East, with most of the countries in the Middle East and South Africa having relatively transparent markets.

The majority of African nations are rapidly developing and markets may consist of only a handful of buildings in some instances, others can suffer from a lack of adequate supply and a lack of responsive ownership.

Corporate occupiers are drawn to Africa and the Middle East for a variety of reasons, including mineral wealth, oil, or an expanding middle class. The characteristics of these markets results in situations where Luanda, the capital of Angola, is the most expensive location within the region.

The combination of significant demand from the extractive sector, and a lack of suitable quality space has resulted in rents in Angola being some of the highest in the world. Furthermore, markets in Nigeria have continued to expand due to notable domestic demand from a variety of sectors to becoming the more expensive office locations in the region.

Below is a ranking of the top ten AME cities in this report according to rental rates.

PRIME OFFICE RENT No. City

Country

Prime Rental Rate Trend

1.

LUANDA

Angola

120

2.

LAGOS

Nigeria

85

Stable

3.

ABUJA

Nigeria

65

Stable

4.

DOHA

Qatar

60

Stable

5.

DUBAI

UAE

45

Stable/Accelerating

Stable/Declining

6.

ALGIERS

Algeria

45

Stable

7.

KINSHASA

Democratic Republic of Congo

45

Stable

8.

ABU DHABI

UAE

41

Stable

9.

CAIRO

Egypt

40

Stable/Declining

10.

ACCRA

Ghana

40

Stable

Source: Cushman & Wakefield, Rent quoted as asking rent USD/sq. m/month

REGION MAP GLOBAL MAP

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ASIA PACIFIC The Asia Pacific (APAC) economy in 2012 exhibited a divergence in growth rates, revealing a split between the developed and developing economies in the region. While the externally oriented, more developed economies of the Asian Tigers and Japan bore the brunt of the pullback in external demand, APAC’s emerging nations were able to call on domestic drivers to buffer economic growth.

While these countries remain susceptible to the global ebb and flow of hot capital, there is little doubt that the diverse APAC region, with countries in various stages of development, holds much of the potential that could drive global economic growth into the next decade.

Some of these countries, having only begun emerging from the clutches of crippling political and social instability in this decade, were only able to kickstart their economic reform recently; others, having embarked on such programs earlier, are refining economic policies for further development.

Almost all countries will present challenges – including security and political risks, corruption, and archaic land use systems – that are endemic in developing economies. Yet, all offer favorable demographics, rapid urbanization, and growing incomes that are fuelling the need for investments in infrastructure – and where demand for corporate real estate is escalating.

Below is a ranking of the key APAC countries covered in this report according to their GDP growth from 2011 to 2012.

ECONOMIC GROWTH- APAC No. Country

% Change in GDP

1.

MONGOLIA

12.3

2.

CHINA

7.8

3.

THE PHILIPPINES

6.6

4.

THAILAND

6.4

5.

SRI LANKA

6.4

6.

BANGLADESH

6.3

7.

CAMBODIA

6.2

8

INDONESIA

6.2

9.

MYANMAR

5.9

10.

INDIA

5.0

11.

VIETNAM

5.0

While the more developed APAC nations bore the brunt of the pull back in global demand, APAC’s emerging countries were able to call on domestic strengths to support growth.

Source: Oxford Economics, GDP 2012

Overview continued on the following page…

REGION MAP GLOBAL MAP

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Property Market Trends The principal markets in APAC have seen a slowdown in occupier demand over the last year.

While Beijing remains the primary office market in the region (and has been considered a leading global market for over a decade), secondary markets in China such as Chengdu, Nanjing, and others are seeing increased occupier demand. These markets now offer competitive economies and improved infrastructures. In China, many transnational corporations have relocated their back-up functions, regional offices or even headquarters to second-tier cities. Manufacturers such as Honeywell, Daimler, and General Motors have established their offices in Chengdu, Tianjin, Wuhan, etc. and IT service corporations like IBM, Intel, and Microsoft have different functions set up in Nanjing and Dalian.

Outside China, the markets garnering the most occupier attention include the Philippines, where demand from the Business Process Outsourcing (BPO) industry in Manila has been a significant driver and Yangon and Jakarta, which have seen rental rates climb to 82USD and 36USD per/sq. m/month.

Below is a ranking of the key APAC cities in this report according to rental rates.

PRIME OFFICE RENT No. City

Country

Prime Rental Rate Trend

1.

YANGON

Myanmar

82

Accelerating

2.

ULAAN BAATAR

Mongolia

70

Accelerating

3.

HO CHI MINH CITY

Vietnam

49

Declining

4.

HANOI

Vietnam

38

Declining

5.

JAKARTA

Indonesia

36

Accelerating

6.

NANJING

China

32

Accelerating

7.

CHENGDU

China

25

Accelerating

8.

DHAKA

Bangladesh

24

Accelerating

9.

MANILA (MAKATI)

The Philippines

23

Accelerating

10.

BANGKOK

Thailand

21

Accelerating

11.

COLOMBO

Sri Lanka

20

Accelerating

12.

PHNOM PENH

Cambodia

19

Accelerating

13.

MANILA (FORT BONIFACIO)

The Philippines

16

Accelerating

14.

CHANDIGARH

India

9

Slowing

15.

KOCHI

India

7

Slowing

Source: Cushman & Wakefield, Rent quoted as asking rent USD/sq. meter/month

REGION MAP GLOBAL MAP

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rEGIONAL OVERVIEWS The following are overviews of the key trends for each region identified in this report. There is a map at the end of each region overview—click on each country to receive a detailed description of the criteria best used to determine the suitability of that country for corporate expansion.

Latin America Africa & Middle East Asia Pacific Global

Contacts Rick Cleveland

Managing Director Research & Strategy, Americas Corporate Occupier & Investor Services rick.cleveland@cushwake.com

Barrie David EMEA Research Consultant

barrie.david@eur.cushwake.com

Sigrid Zialcita

Managing Director Head of APAC Research sigrid.zialcita@ap.cushwake.com

Kenneth McCarthy

Chief Economist ken.mccarthy@cushwake.com This report has been prepared by Cushman & Wakefield, Inc. In some cases, Cushman & Wakefield relied on its alliance partners globally for information, with particular thanks to the following offices: Africa: ProAfrica Property Services Middle East: Cluttons LLP; Michael Dunn & Co. S.A.L. Thailand: Nexus Property Consultants Ltd. Cushman & Wakefield (C&W) is known the world-over as an industry knowledge leader. Through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world and business issues of the day, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position.

In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, C&W also provides customized studies to meet specific information needs of owners, occupiers and investors.

C&W is the world’s largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917, it has 253 offices in 60 countries and nearly 15,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $3.7 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.

This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Published by Corporate Communications. Š2013 Cushman & Wakefield, Inc. All rights reserved.

Navigating EMERGING Markets

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