| 1

WIN-WIN REAL ESTATE STRATEGIES:

CLOSING ASIA’S INFRASTRUCTURE GAP

COLLIERS INSIGHT ADVISORY & CONSULTING | APAC | 28 SEPTEMBER 2018

| 2

EXECUTIVE SUMMARY

By 2030, an estimated US$20 trillion in infrastructure investment will be needed across Asia. Currently, the region invests only about half of that amount every year (US$880 billion), 90% of which is financed by governments or government-linked agencies.

Most infrastructure projects are not financially viable on their own. Built first and foremost for their public benefits, they generate limited revenue to be attractive for investors. As a result, investors and financiers are unwilling to finance infrastructure projects where investment returns are often too low, break-even periods are too long and/or the risk is too high.

Real estate strategies can play a significant role in making infrastructure projects more bankable – raise the projects’ investment yield - through value creation and revenue generation schemes that are attractive to private sector investors. They are particularly effective in closing the financing gap for transportation infrastructure, including airports, seaports and mass rapid transit systems.

This report examines strategies that can be tapped to finance transport infrastructure projects through real estate asset monetisation and long-term revenue generation.

In order to be successful, real estate strategies around infrastructure projects must achieve the public benefits expected by government authorities and communities while meeting market requirements and generating reasonable financial returns at an acceptable risk level for private investors.

JONATHAN DENIS-JACOBAssociate Director Valuation and Advisory Services Colliers International Singapore

| 3

03STATE OF THE INFRASTRUCTURE GAP IN ASIA

04THE ROLE OF REAL ESTATE IN INFRASTRUCTURE FINANCING

06SKY’S THE LIMIT: THE RISE OF THE AIRPORT CITY

1 1RULE THE SEAS: PORT DEVELOPMENT AND EXPANSION

14RAIL POTENTIAL: MASS RAPID TRANSIT SYSTEMS

20RECAP: INFRASTRUCTURE-RELATED REAL ESTATE FINANCING MECHANISMS

2 1KEY SUCCESS FACTORS

22FULFILLING OBJECTIVES: WHAT MATTERS TO WHOM?

TABLE OF CONTENTS

| 4

STATE OF THE INFRASTRUCTURE GAP IN ASIA

Currently, the region invests only about half of that amount every year (US$880 billion). This means that the infrastructure investment gap across Asia will grow to over US$800 billion per year in years to come2. What’s more, 90% of current infrastructure projects are financed by governments or government-linked agencies. As national, state and local governments reach their maximum spending and borrowing power, attracting private investments into infrastructure projects emerges as a top priority to address Asia’s infrastructure investment gap.

On one hand, there is a considerable amount of capital available for financing infrastructure projects across Asia and on the other, a sizeable number of infrastructure projects looking for capital. However, despite all that capital available for financing projects, many of them still go unfunded as most infrastructure projects are not financially viable on their own. Infrastructure are built first and foremost for their public benefits, so they generate limited revenue to be attractive for investors. As a result, investors and financiers, whether private or institutional, are unwilling to finance projects where investment returns are often too low, break-even periods are too long and/or the risk is too high.

The solution is to make infrastructure projects more bankable through value creation and revenue generation schemes that are attractive to private sector investors.

Real estate strategies, alongside public-private partnerships, infrastructure bonds, user’s fees, advertising and naming rights, can play a significant role in improving the bankability of projects, particularly for transportation infrastructure, by bridging the finance gap, attract private investments and supporting the long-term viability of an infrastructure asset.

This paper provides a snapshot of how real estate strategies can be leveraged to finance and deliver high-quality transportation infrastructure projects across Asia.

A staggering infrastructure finance deficit is threatening Asia’s growth and prosperity. By 2030, an estimated US$1.7 trillion per year (or total of US$20 trillion by 2030) in infrastructure investment will be needed in the region to keep pace with economic development, sustain population growth and urbanisation and mitigate the effect of climate change1.

1 Meeting Asia’s Infrastructure Needs. Asian Development Bank. 2017 and Bridging Global Infrastructure Gaps. McKinsey. 20162 Same as above.

| 5

THE ROLE OF REAL ESTATE IN INFRASTRUCTURE FINANCING

Real estate can contribute to the financial viability of a transportation infrastructure in two ways:

Capital can be raised when a real estate asset is monetised to finance the construction of a new infrastructure. In most infrastructure projects, a significant amount of upfront capital is required to cover initial capital expenditure costs, such as land acquisition, planning and construction. Raising upfront capital allows infrastructure projects to reduce their reliance on government funding and long-term debt, thereby ensuring greater financial viability.

Infrastructure Pro Forma

Milli

on

The real estate component of infrastructure projects helps generate long-term revenue streams to cover operating, financing and maintenance costs and to increase the project’s overall investment yield.

Real estate strategies are increasingly critical components of transportation infrastructure projects such as mass rapid transit networks, ports, airports and roads.

Infrastructure projects are seldom financially viable on their own. The operating expenses (Op Ex) and the capital cost generally exceed the infrastructure operating revenue, generating a negative EBITDA (cash flow) on the infrastructure balance sheet. Governments often end up providing subsidies to close this revenue gap. In addition, the actual internal rate of return (IRR) is lower than what would be expected by investors for the level of risk infrastructure projects entail.

Fictional chart for illustrative purposes only

2018 2020 2024 2026 20282022 2030 2032 2034 2036 2038 2040 2042 2044 2046 2046 2050

$600

$400

$200

-$200

-$400

-$600

-$800

-$1,000

-$1,200

$0

26 2028 2030 2032 2034 2036 2

0

38 2040 20

4

2

4

UpfrontCapEx

PeriodicUpgrades

EBITA

EBITA and Cap Ex Total Cost (Cap Ex and Op Ex) Infrastructure Operating Revenue

Shortfall

Actual

IRR

Expectedby Investors

IRR

Monetisation Long-Term Operating Revenue

| 6

In addition to improving the bankability of infrastructure projects, real estate strategies also play a key role in turning transportation infrastructure nodes into livable, attractive and vibrant urban destinations. Through best-in-class urban design and planning practices and the right activity mix, real estate strategies become an essential component of the place-making and public realm enhancement efforts surrounding major urban infrastructure.

Real estate strategies, through monetisation and operating revenue, can bridge the infrastructure finance gap by raising upfront capital and generating steady operating income to help the infrastructure generate positive cash flow. The additional revenue generated from real estate also increases the IRR of the project, which helps make it more attractive from an investor’s perspective.

BEFORE AFTER

Source: Network Rail

Infrastructure Pro Forma (with Real Estate)$400

$200

-$200

-$400

-$600

-$800

-$1,000

-$1,200

$02018 2020 2024 2026 20282022 2030 2032 2034 2036 2038 2040 2042 2044 2046 2046 2050

EBITA and Cap Ex(without real estate)

EBITA and Cap Ex(with real estate)

Monetisation

Operating Revenue

WithoutReal Estate

IRR

WithReal Estate

IRR

Milli

on

Fictional chart for illustrative purposes only

The rejuvenation of King’s Cross Station in London, one of the largest train infrastructure in Europe, has had a catalyst effect on the regeneration of the surrounding neighborhood. Through a public space enhancement and activation strategy, the vicinity of the station evolved from a functional transit hub to one of London’s favorite public squares and most sought-after office locations.

Rejuvenation of King’s Cross Station Square, London

CASE STUDY

Beyond the Financials: Catalyst for Urban Regeneration

| 7

SKY’S THE LIMIT: THE RISE OF THE AIRPORT CITY

To accommodate future growth, an estimated US$500 billion in total investment is expected over the coming decades to upgrade existing or build new airports across Asia3. The construction of new airports alone will require over US$125 billion throughout the region4. The sheer size of investments in future airport assets across Asia is a substantial opportunity for infrastructure and real estate investors alike.

Airports are major local and national economic drivers. In an increasingly globalised economy, airports have become the essential nodes connecting cities and regions to the global economic system. Given that airports usually have a regional monopoly and attract millions of passengers and visitors every year, they emerged as prime business and commercial locations within their cities and regions.

Airports are now much more than just aviation infrastructure. With economic development, revenue generation and passenger experience as key considerations, the role of airports have become multi-functional. Airport terminals and facilities are no longer places where passengers just pass through during their travel journeys, they are becoming attractive destinations where people work, shop, eat, play and stay.

As airports transform into mixed-use environments, real estate is becoming an increasingly important component of airport development strategies.

In particular, revenue diversification has become a top priority for airport authorities. Traditionally, airports served airlines as their primary clients and their financial performance was correlated with the fortune and woes of a highly cyclical tourism industry. Airport authorities now develop comprehensive revenue generation strategies beyond aeronautical revenues. Non-aeronautical revenues now account for 25% to 40% of total operating revenues in major international airports globally.

Airports are a unique infrastructure asset class which provides beneficial conditions for real estate development. Airport authorities own and control their land base and have the financial capability to invest in long-term real estate projects.

As airports embark on long-term capital expenditure plans to finance the expansion and upgrade of their facilities, comprehensive real estate plans emerge as one of the key strategies helping airports raise capital, diversify revenue and provide a best-in-class passenger experience.

Airports can raise massive upfront capital and generate long-term operating revenue by leveraging the development potential of both airside and landside land, across different asset classes.

Why Real Estate Matters for Airport Authorities?

3 CAPA Centre for Aviation: Global Airport Construction Database4 Same as above.

| 8

Capital is raised primarily by monetising the development potential of the airport’s landside land bank.

According to Colliers International’s airport project experience, the monetisation of landside real estate can amount to as much as 30% of the total airport development cost, depending on the nature, size and specifications of the airport’s project and the market where it is located. Several mechanisms are employed by airports to monetise real estate assets and finance major capital expenditures early on in the project cycle, including:

> Long-term prepaid ground leases for landside development;

> Development air rights (usually for hotel or office development);

> Development joint-venture agreements (for hotel or commercial development);

> Debt financing with real estate asset as collateral.

Airports that raise significant upfront capital from real estate are more successful in securing long-term debt financing and attracting private investors. They are also less dependent on government subsidies and operating revenues to pursue their capital expenditure plans.

Monetisation from Real Estate

The airside land base of an airport refers to the areas supporting the aeronautical functions of the airport. It includes land for terminal buildings, runways, maintenance hangars, control tower and other aeronautical functions.

The landside land base is not part of the aeronautical operational requirements and long-term expansion plans. Land side land is generally well-connected to urban amenities and transport infrastructure and is best suited to accommodate ancillary airport uses and activities.

Airside vs Landside

Source: City of Richmond and YVR Airport

YVR Vancouver International Airport

AirsideLandside

| 9

AIRSIDE

LANDSIDE DEVELOPMENT

Terminal F&B Changi Airport, Singapore

Terminal Leisure & Wellness Hong Kong International Airport

Pay Parking Changi Airport, Singapore

Terminal Hotel Fairmont, Vancouver International Airport

Terminal Retail Changi Airport, Singapore

Retail Edmonton International Airport Mall

Hotel Hong Kong SkyCity Marriott Hotel

Business Park Changi Business Park

Logistic / Manufacturing Dublin Airport Logistics Park

| 10

As airports expand and upgrade to more state-of-the-art facilities, revenue diversification away from aeronautical revenues (AR) - airline landing, terminal, and ancillary fees - have become critical to cover raising operating costs and maintain reasonable investment yields.

According to Colliers International’s airport project experience, non-aeronautical revenues (NAR) generally account for 25% to 40% of total airport operating revenues, the bulk of which is from real estate-related revenue streams such as:

> Rental revenue from airport-owned commercial/industrial property portfolio

> Licensing agreement from hotel, retail, business park and convention centre operators

> Food and beverage concessions

> Pay parking fees and other user fees

For existing airports, the development of additional non-aeronautical revenues through real estate can provide a significant boost in earnings, improve the investment yield and ultimately increase the asset’s valuation, especially for airports with a particularly low NAR.

Operating Income from Real Estate

The Vancouver Airport Authority formed a joint venture with the McArthurGlen Group to develop the 80-store landside retail development on YVR airport land. The YVR Designer Outlet Centre - 50% owned by the Vancouver Airport Authority - is an innovative source of non-aeronautical revenue which supports airport operations. Since its opening in 2015, the YVR Designer Outlet Centre has emerged as one of Metro Vancouver’s most popular shopping and tourism destinations.

YVR Designer Outlet Centre, Vancouver International Airport

CASE STUDY

Source: Peña Station NEXT

Source: YVR Designer Outlet Centre

DEN Real Estate, the Denver International Airport Real Estate division, is a co-developer of the Peña Station NEXT project, a 400-acre "transit-oriented" smart city development on airport land located on the train route connecting Denver to its international airport. DEN Real Estate supports DEN’s core aviation mission through optimising and monetising the value of non-aviation land through innovative, sustainable, well-designed (place-making) and economically beneficial commercial real estate.

Peña Station NEXT project, Denver International Airport

CASE STUDY

| 11

Beyond the financials, airport real estate strategies also factor in long-term strategic and operational considerations, including:

Key Considerations for Airport-City Real Estate Strategy

Airports should carefully balance the goal of maximising potential revenue from real estate while reserving sufficient airside land to meet future growth requirements.

Airport premises should provide a retail, service and activity mix that enriches the overall passenger experience.

Airport should reserve land to accommodate airport-related industries and economic activities that are critical for regional economic growth.

In order to be successful, “Airport-City” strategies should complement – not directly compete – with the surrounding urban area. The airport should aim to attract investors, businesses and real estate assets that add value to the offering and generate catalyst effect on the economic base of the wider region. The airport authority should also ensure infrastructure connectivity between the airport and the wider city.

Potential environmental and social impact should be assessed to ensure the real estate strategy do not materially impact airport operations and nearby communities. Local stakeholder and community engagement should be an integral part of comprehensive airport city development strategy to ensure it is aligned with local priorities.

Airport land across Asia is usually held on a leasehold basis, with tenure periods ranging from 30 to 99 years. The real estate development strategy, including the land pricing and development conditions, laid out by Airport authorities should take into account the land tenure and the ability for investors to achieve viable investment yields within a reasonable timeframe.

Land Allocation Strategy

Passenger Experience

Regional Economic Development

Synergy Between the Airport and City

Environmental and Social Impact

Investment/Development Conditions in Accordance to Land Tenure Periods

| 12

RULE THE SEAS: PORT DEVELOPMENT AND EXPANSION

As a result, Asia’s port infrastructure industry is expected to double by 2026 as port authorities across the region expand and increase their capacity and develop new port facilities6. The numerous major port development projects across Asia illustrate this trend.

The new multi-billion dollar Tuas Mega Port project in Singapore will increase the port's capacity to 65 million TEUs (twenty-foot equivalent units) of cargo and more than double the capacity the port currently handles.

In Malaysia, three major new port developments are in the pipeline, including the Carey Island port-industrial city project valued at RM100 billion, the Melaka Gateway project estimated at RM42 billion and the new RM4-billion deep-water port project in Kuantan. In addition, the existing port facilities of Port Klang and Tanjung Pelepas have large capacity expansion works.

China, India, Sri Lanka, Indonesia, Thailand and Vietnam also announced plans to invest heavily in port infrastructure in the coming years, including as part of large-scale Free Trade Zone (FTZ) initiatives.

On the tourism front, the cruise industry is the fastest-growing tourism segment in Asia, with passenger capacity rising threefold from 2013 to 2017 across Asia and Asian passenger volume averaging 41% growth from 2012 to 20177. Sustained cruise tourism growth and increasing port calls around the region will support the need for new cruise terminal infrastructure across Asia, particularly in ports of calls that are not currently part of existing cruise itineraries.

Currently, 60% of the world’s fast-growing seaborne trade passes through Asia5. To maintain its prominent position on global trade, the region will require significant investments as its ports reach their full capacity. Furthermore, the deployment of mega-ships, the shift to automation and the rising importance of trans-shipment cargo require port terminals to upgrade and modernise their on-site facilities and off-site infrastructure to remain competitive and improve access to markets.

Marina Bay Cruise Centre, Singapore

City Terminals, Tanjong Pagar Singapore

5 United Nations Conference on Trade and Development (UNCTAD). Review of Maritime Transport 20176 BMI Research. Markets for Growth: May 9, 20177 Cruise Line International Association. Asian Cruise Trends 2017

| 13

While global seaborne trade is expected to continue growing at about 3.2% per year until 20228, small and medium-sized ports across Asia also face increasing competition from mega-ports such as those of Hong Kong, Singapore and Shanghai. With the deployment of mega-ships and the consolidation of the industry into a select group of ship lines, mega-ports become the preferred ports of calls due to their higher efficiency, productivity and economies of scale.

Several countries in Asia have established Free Trade Zones in and around major port facilities to attract investment and shipping cargo. More port-oriented free trade zones are in the pipeline and will intensify competition between port locations across the region.

With rising competition for cargo handling activities, Asian ports need to diversify their service offering and consider alternative areas of growth to generate revenue, such as inland ports, warehousing, cold storage, distribution and logistics facilities as well as the fast-growing cruise segment, all of which are achieved through comprehensive real estate strategies delivered in partnership with private sector investors and operators.

Uneven Port Growth on the Horizon: Mega-Ports and Free Trade Zones

Port Activity and Revenue Diversification is the Way Forward

Real estate strategies on port-oriented lands are deployed to raise upfront capital for port expansion and upgrading plans, generate long-term revenue streams and support local economic development and urban regeneration strategies. Real estate asset classes below are usually the most common for port-oriented lands.

Warehousing and Storage

Logistics and Distribution

Free Trade Zones

Tourism (Cruise, Attractions)

Urban Land-Use

Port authorities usually own and control port-oriented lands. However, both marine-side and land-side real estate is developed in partnership with port facility operators and industrial property developers. Public-private partnerships with private port terminal operators are common practice to attract private investment participation, access specialised skills, innovations and technological capability and ensure infrastructure development, operation and maintenance.

Win-Win Public Private Partnerships for Successful Port Infrastructure Delivery

8 UNCTAD, Review of Maritime Transport 2017

| 14

Source: Abu Dhabi Ports

The Khalifa Industrial Zone (or Kizad) developed by Abu Dhabi Ports (ADPC) Company will spread over 417 square kilometres and will be the largest free trade zone in the world. The project is the key element in Abu Dhabi Economic 2030, which aims at diversifying the economy. By 2030, Kizad is expected to contribute around 15%of Abu Dhabi’s non-oil GDP.

A long-term real estate strategy was developed to attract occupiers from a variety of economic sectors.

Khalifa Port Free Trade and Industrial Zone in Abu Dhabi

CASE STUDY

Strategic Considerations for Successful Port Infrastructure

Port authorities should carefully plan for future land requirements to accommodate marine-side activities and infrastructure. Long-term land planning strategies are essential to determine the type and amount of non-marine development that should be permitted on port lands.

Due to historic reasons, port authorities often control a large share of prime waterfront land in the heart of major cities. With the rising value of prime land in cities and the growing space requirements of port facilities, the development of port lands can yield long-term financial as well as urban rejuvenation benefits with a well-laid out real estate strategy.

Port authorities have a significant role to play in transforming Asian cities into attractive world-class tourism destinations. With the staggering growth of the cruise tourism segment, port authorities have an opportunity to establish new tourism destinations in cities across Asia. Through comprehensive real estate and urban regeneration strategies, port authorities can develop state-of-the-art cruise infrastructure and integrate them into highly attractive mixed-use waterfront destinations.

Land Allocation Strategy

Urban Regeneration Opportunity Tourism Development

Environmental, economic and social impact assessment should be an integral part of port-oriented real estate strategies, special economic zone schemes and free trade zone initiatives.

Impact AssessmentBased on local and regional economic development strategies, port-oriented land banks should be reserved to accommodate specific activities/industries with a catalyst effect for local economic growth, including as part of free trade and special economic zones.

Regional Economic Development

| 15

RAIL POTENTIAL: MASS RAPID TRANSIT SYSTEMS

A large number of mass transit projects are currently under development across Asia. In India alone, 24 mass rapid transit systems are being planned or developed. In Vietnam, the country’s first rail mass rapid transit systems are under construction in Hanoi and Ho Chi Minh City. Large-scale expansion projects are also underway or in the pipeline in cities currently under-served by mass rapid transportation infrastructure, including in Manila, Jakarta and Bangalore.

Developed economies across the region are also expanding their mass transportation systems. Singapore is working on doubling its MRT system by 2030 to reach circa 360 km in length, with the goal of serving 80% of the city-state’s households within a 10-minute walk from an MRT or light rail station. In Hong Kong, six new MTR lines or expansions as well as a new rail connection to Mainland China as part of the Greater Bay Area are currently underway or in the pipeline.

Mass rapid transit systems are the backbones of Asia’s growing cities. With rapid urbanisation underway throughout the region, the construction and expansion of mass rapid transit systems has become a key priority. The Asian Development Bank (ADB) estimated that total investments in subway construction would reach US$230 billion in Asia from 2016 to 20309.

9 Meeting Asia’s Infrastructure Needs. Asian Development Bank. 201710 Same as above

At an average construction cost ranging from US$100 to US$500 million per km10 , mass rapid transportation projects require multi-billion dollar capital investments from governments across Asia. Yet mass rapid transit infrastructure are rarely financially viable on their own. Their construction is driven first and foremost by the public benefits they generate – reduced congestion, cleaner air, improved connectivity - not by their expected financial return. Fare box revenues are low relative to the sheer size of the upfront capital invested and often do not even cover operating expenses.

Government subsidies are common practice to finance the infrastructure and maintain an affordable fare structure. The break-end periods are usually too long and the internal rate of return too low for the private sector to actively finance the infrastructure without heavy government subsidies.

High Upfront Cost, Insufficient Fare Box Revenues

| 16 11 Diao M., Leonard D. and Sing T.F. (2017) Spatial-difference-in-differences models for impact of new mass rapid transit line on private housing values.

Journal of Regional Science and Urban Economics.

The success of real estate developments and mass rapid transit systems are closely linked. Real estate helps feed transit systems with passenger traffic by providing the population and employment density and the form of development that makes transit a viable urban transport solution.

On the other hand, mass rapid transit systems, more specifically stations, help drive real estate assets by providing the captive clientele and foot traffic. The construction of a new mass rapid transit infrastructure can have a material impact on real estate assets, including increased property values, stronger retail sales and higher rents and occupancy, which often lead to an increase in land market value or “land lift”.

Mass rapid transportation infrastructure can raise upfront capital and generate long-term operating revenue by leveraging the development potential of multiple real estate asset classes in and around stations:

The Symbiotic Relationship of Mass Rapid Transit and Real Estate:

Transit and the Rising Property Values: the Circle Line in Singapore

Transit-Oriented Developments (TOD)

The opening of the Circle Line in Singapore in 2009 had the effect of increasing the resale value of residential properties located within the 600-metre network distance from the new stations by approximately 8.6% above to the overall average market value increase in Singapore11.

TODs are developments planned and designed to provide compact, dense, pedestrian- and bicycle- friendly, and mixed-use conditions around transit stations. The underlying principle of TODs is the role of mass rapid transit as the primary travel mode and driver of urban activity. The co-location of multiple activities within the TOD (jobs, shops, housing, amenities) encourages transit traffic, walking and cycling.

The adoption of the TOD urban design and planning guidelines – not just proximity to a station - is the primary feature of the TOD concept. A TOD should incorporate key urban design elements that turn a transit node into both a functional and attractive urban destination such as street-oriented retail, sheltered walkways, pedestrian crossings, large sidewalks, street furniture, public space activation, wayfinding signage among others.

Shopping Centre / Retail Hotel Residential Mixed

Development Office

Clementi Mall and Block 441 A & 441B

| 17

Land-value capture is the process by which the “land value lift” associated with a new public infrastructure is monetised toward the delivery cost, either through government regulation or the private sector’s own initiative.

The underlying principles are that benefits incurred from a publicly-funded infrastructure should be shared between private and public interests and that infrastructure projects are more likely to be delivered with a buy-in from developers and investors. As such, when the land value of a site increases as a result of a land-use policy change or the construction of a new transport infrastructure nearby, a share of this land lift should be shared to pay for part of the scheme.

Land-value capture schemes are successful only in cases where there is a clear land lift associated directly with a new infrastructure. Land-value capture schemes can be implemented at several scales, for instance around one station, along a transport corridor or as part of an entire mass transit system, and through land sales and/or changes in the land-use policy.

Land-Value Capture: Monetising the “Land Value Lift”

Land Lift Example

Baseline Land Value(No Station)

Baseline Land Value(No Station)

Baseline Land Value(No Station)

Land-lift(Transit)

Land-lift(Transit)

Land-lift(Upzoning)

Value Creation

The real estate value creation generated by infrastructure projects include two types of land lifts (1) the transit land-lift and (2) the upzoning land-lift.

The “transit land-lift” occurs when the market value of an existing property increases as a result of a new transit infrastructure, without any changes to the physical attributes or zoning of a property.

The “upzoning land-lift” occurs when the development potential of the property increases as a result of the new transport infrastructure and changes in the permitted land-use policy or zoning. The higher land value is reflective of the redevelopment potential of a property based on its highest and best use in a given market.

| 18

Capstan Way Station is a proposed transit station on the Canada Line located in the City of Richmond, British Columbia in the Metro Vancouver region. The US$25 million station is being funded entirely through land-value capture by development contributions from real estate developers. In exchange for additional development density approved by the City of Richmond within a certain parameter from the proposed station, real estate developers contributed an amount of approximately US$6,500 per housing units toward the construction cost of the station. With the approval of about 7,000 residential units within the area, the funds needed to finance the station were raised within just six years, rather than the 15 years originally anticipated. This project is a successful example of a win-win strategy which yielded significant public benefits while generating investment opportunities for investors.

The “Reseau Electrique Metropolitan” is the largest regional mass rapid transportation system project currently underway in North America. The mass rapid transit project will connect downtown Montreal, Pierre-Elliot Trudeau International Airport and several key suburban locations across Greater Montreal. The project is financed and developed by CDPQ Infra, a local infrastructure investment fund owned by the Quebec Public Pension Fund.

The Quebec Government, in partnership with municipalities in the Greater Montreal area, introduced a land-value capture mechanism for new developments located within 1 km from a future REM station. A development contribution of approximately CA$10 per sq ft (US$7.50) of new buildable floor area will be charged to developers. Revenue from this scheme is expected to account for approximately 10% of the project’s total construction cost.

Capstan Way Station, Vancouver, Canada: Station Financing through Land-Value Capture

Montreal’s REM: Regional Transit System Financing through Land-Value Capture

CASE STUDY

CASE STUDY

Land-value capture is not the only mechanism through which monetisation can be achieved to finance mass rapid transit infrastructure projects. Other common mechanisms can be considered based on the unique conditions of each case:

> Land and property sale;

> Pre-paid long-term ground leases for development;

> Sale or transfer of development rights around and above stations;

> Development joint-venture agreements on land around and above stations;

> Leverage of existing real estate assets

In order to cover operating costs and long-term financing obligations, transit authorities can use real estate strategies to increase and diversify their revenues streams such as:

> Rental revenue from retail within stations – owned space within station

> Rental revenue from retail, office, residential property above the station (developed and owned by transit commission / government agency)

> Advertising boards and panels

> Pay parking fees

Operating Revenue from Real Estate:

| 19

One of the costliest and most complex components of a mass rapid transit projects is the right-of-way land acquisition process. Governments and public transport authorities need to acquire the land to develop new infrastructure, but the price they are willing to pay may not match the owners’ expectations which can often lead to long transaction delays, litigation and, in certain cases, expropriation.

In order to provide certainty in the infrastructure planning process, infrastructure projects increasingly comprise a comprehensive land acquisition strategy which includes land bank and land swap components.

Land banks with development rights are acquired around and near transit stations for future development, some of them are retained by the government for future monetisation and others are sold to the private sector via public tenders.

Land swap deals provide governments and transportation authorities with the opportunity to secure the right-of-way land needed for the infrastructure - one of the most challenging components of a mass rapid transit projects. Low-value right-of-way land is exchanged for higher-value development land around station nodes on a “value-for-value basis” or otherwise decided by the local stakeholders. The provision of development rights, including changes in the land-use policies which align with the highest and best-use development potential, is often a key component to reach a land swap agreement between the public and the private sectors.

Land Acquisition

Hong Kong’s R+P model incorporates both monetisation and long-term operating revenue from real estate to finance rail infrastructure. Hong Kong’s mass transit authority, MTR Corp, has a well-established real estate investment arm aimed at monetising development rights above and around MTR stations, either by way of transfer to and joint-venture with private developers.

MTR also retained ownership of dozens of income-generating commercial properties located at MTR stations across Hong Kong, including shopping centres and office buildings, whose income streams account for a significant share of its revenues. The retail space within MTR stations is also a significant source of revenue for MTR. Because of the real estate income, MTR is able to maintain low fares and expand its network without any government subsidies.

The Rail + Property (R+P) Model – MTR Corporation, Hong Kong

CASE STUDY

| 20

Key Strategic Considerations for Mass Rapid Transit Systems

Proposed developments around a mass rapid transit station should not be planned merely for their financial potential. Their development concept should balance the opportunity for asset monetisation with the potential to create an attractive urban destination. The creation of a vision and planning guidelines early on is an important consideration, especially for transit-oriented developments.

Finance and Quality of the Built Environment

When a new mass rapid transit is built, the allowable density, land-use, form of development guidelines, site coverage ratios and other development parameters should be revisited and assessed against market potential, including the opportunity for monetisation toward infrastructure financing. Land-use policy should align with the transit-orientated function of the area and the market development potential around the station.

Land-Use Policy Aligned with Market Potential

Developers' contributions required by the authorities toward the infrastructure delivery cost should be set at a level that does not significantly increase risk and that maintains the overall financial viability of the project. The financial contribution should factor in the level of risk and uncertainty that come with the delivery of a long-term infrastructure and real estate programme such as shifting market conditions, rising construction and financing costs, construction delays, etc. Requiring contributions that are too high can undermine the financial viability of the project from the developers' perspectives.

Reasonable Developers' Contributions

Real estate development projects around mass transit infrastructure have to factor in potential uncertainties such as the exact timing of the infrastructure delivery and the long-term operating costs associated with the location. The government and infrastructure authority should provide certainty and legal guarantees to the private sector partners on the timeline of the infrastructure delivery and the future taxation and cost-sharing scheme associated with the location.

Certainty on Timeline and Costs

| 21

Aggressive Risk and Return

High Risk and Return

Medium Risk and Return

Low Risk and Return

Least Risk and Return

Government or infrastructure authority enters into a long-term agreement with a private developer to build, own and hold a revenue-generating real estate asset. The agreement can include fixed lease payments or a share of the asset’s operating income.

Development Agreement

Infrastructure or amenity is financed, built and delivered turn-key by the developer to government and/or owner in exchange for development rights or planning permission for a new development.

Turn-Key Delivery AgreementA share of the real estate value creation is captured toward the cost of an infrastructure. Land-value capture is usually achievable through changes in land-use policy (increased allowable development density and introduction of new land-uses).

Land Value Capture

Government or infrastructure authority levies a per build area fee from developers to cover the costs associated with local infrastructure upgrades to accommodate a new development (sewage, road, water pipes, access, etc.)

Development Impact Tax

Property tax surcharge introduced in certain areas to reflect the local benefits of a new infrastructure or other local area improvement initiatives.

Special Assessment and Special Tax Districts

Local property tax increment linked to the financing costs of the infrastructure. The tax is usually levied on both existing real estate properties and new developments.

Tax Increment Financing

Government or infrastructure authority partners with private developer in a real estate project. The asset can be leveraged or monetised once developed. The revenue, costs and risks are shared between the government / infrastructure authority and the private sector partner.

Development Joint-Venture

Infrastructure right-of-way land is exchanged for more valuable land with development potential, serviced by or near to infrastructure.

Land Transfer / Land SwapsThe sale of development air rights above stations, depots, terminals and other infrastructure. Depending on the market, location and land ownership policy, air rights can be sold under a freehold or leasehold tenure.

Prepaid ground lease for a limited time period (typically 30 to 99 years) for development sites located around the infrastructure. Ground leases are a way to monetise development rights while retaining long-term control over the land base.

Development Rights (sale)

Government or infrastructure authority leases the development air rights of a given site in exchange for long-term periodic lease payments.

Development Rights (lease)

Government or infrastructure authority develops and retains full ownership of income-generating real estate assets. Potential revenues, costs and risks are fully borne by the government or infrastructure authority.

Development, Lease and Hold: 100% Ownership

A variety of mechanisms exist to leverage the value creation from real estate to finance infrastructure projects.

Below are 11 broad categories of available mechanisms commonly used as part of infrastructure-related real estate strategies. The selection of the mechanism depends on the specific financing and business objectives of each government or infrastructure authority.

The level of risk and financial return vary considerably depending on the type of mechanism implemented. A careful assessment of the expected costs, benefits, returns and risks should be undertaken when determining which financing mechanism is suitable for a given infrastructure project.

RECAP: INFRASTRUCTURE-RELATED REAL ESTATE FINANCING MECHANISMS

| 22

Whether it is to achieve monetisation or to generate long-term operating revenue, key principles should be followed in order to implement a successful infrastructure-related real estate strategy.

KEY SUCCESS FACTORS

There should be a market opportunity for new real estate assets at or around the infrastructure. Without the market opportunity, the real estate asset can become a liability.

Land-use policies and planning regulations should reflect the highest and best-use development potential on and around infrastructure land.

Land and property at or around transport infrastructure may be considered prime real estate, but lease rates and sale prices should remain competitive in the broader market. If the asset commands a price premium due to its location, the business reasons and value-add should be made clear to private sector partners and occupiers.

The conditions stated in the real estate strategies and financing mechanisms should be fair, reasonable and favourable to all parties and be based on independent review of market conditions and the expected financial performance of the asset.

Given the complexity of infrastructure projects and the variety of stakeholders involved, clear and thorough legal agreements between government, government, the infrastructure authority and the real estate asset’s developers, operators, tenants and occupiers are essential.Comprehensive dispute resolution mechanisms should be put in place from the outset.

A robust government regulation and legal framework should be in place to ensure the transparency, implementation and enforcement of legal agreements, financing mechanisms and land-use policy amendments.

Real estate development partnerships, joint-ventures and other agreements require independent fair market valuation of the development land and other real estate assets. The determination of the fair market value is an essential component to establish the price of the asset and the conditions of the agreement.

Market Opportunity

Land-Use Policy

Competitive Market Pricing

Reasonable Win-Win Conditions

Legal Agreements and Dispute Resolution Mechanisms

Government Regulation and Legal Framework

The proposed size, location, concept and specifications of the real estate asset project must meet the industry’s business and operational requirements.

Market-Ready Product

Valuation

| 23

FULFILLING OBJECTIVES: WHAT MATTERS TO WHOM?

Stakeholder Priorities

Government Agency

> Public Benefits: Economic development, job creation, tax revenue, environmental and social sustainability

> Limited government subsidies and financing

> Positive public opinion and feedback

Real Estate Developer

> Rapid development and planning approvals

> Project financial viability

> Investment yield: Return on investment (ROI) and Internal rate of return (IRR)

> Project marketability

> Long-term capital value appreciation

Infrastructure Investor

> Investment yield: Return on investment (ROI) and Internal rate of return (IRR)

> Infrastructure revenue (ridership, fare box revenue, aeronautical revenue, etc.)

> Revenue diversification

> Risk management

> Sustainable operating and maintenance costs

Financial Institution

> Project financial viability

> Investment yield: Return on investment (ROI) and Internal rate of return (IRR)

> Operating revenue and cashflow

> Revenue diversification

> Risk management

Multi-Lateral Development Bank

> Public benefits: Economic development, job creation, tax revenue, environmental and social sustainability

> Capacity building

> Transparency and accountability

| 24

Real estate strategies can play a significant role in making infrastructure projects more bankable across Asia through value creation and revenue generation schemes that are attractive to private sector investors, thereby contributing to bridging Asia’s infrastructure finance gap.

In order to be successful, infrastructure real estate strategies must provide win-win conditions for all the stakeholders involved. This includes ensuring the delivery of public benefits as expected by communities and the public sector and the possibility of a descent return on investment at an acceptable level of risk for private investors and financiers.

Real estate strategies should also factor in the strategic implications of infrastructure projects and their long-term operation and land requirements. In addition, they should take into account the catalyst effect of infrastructure projects in shaping vibrant, attractive and sustainable urban destinations, whether they are airport-cities, seaports, waterfronts or transit-oriented developments.

CONCLUSION

| 25

Our Specialistsin the Region

JONATHAN DENIS-JACOB Associate Director Valuation and Advisory Services Singapore Jonathan.Denis-jacob@colliers.com

AMIT OBEROIExecutive Director Infrastructure Consulting New Delhi Amit.Oberoi@colliers.com

DAVID FAULKNERManaging Director Valuation and Advisory Services Hong Kong David.Faulkner@colliers.com

This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s). ©2018. All rights reserved.