CLOSING ASIA'S INFRASTRUCTURE GAP - WIN-WIN REAL ESTATE STRATEGIES: Colliers
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COLLIERS INSIGHT ADVISORY & CONSULTING | APAC | 28 SEPTEMBER 2018
WIN-WIN REAL ESTATE STRATEGIES:
CLOSING ASIA’S
INFRASTRUCTURE
GAP
| 1
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-JACOB
Associate Director
Valuation and Advisory Services
Colliers International Singapore
| 2
TABLE OF CONTENTS
STATE OF THE INFRASTRUCTURE
GAP IN ASIA
03
THE ROLE OF REAL ESTATE IN
INFRASTRUCTURE FINANCING 04
SKY’S THE LIMIT:
THE RISE OF THE AIRPORT CITY 06
RULE THE SEAS:
PORT DEVELOPMENT AND EXPANSION 11
RAIL POTENTIAL:
MASS RAPID TRANSIT SYSTEMS 14
RECAP: INFRASTRUCTURE-RELATED
REAL ESTATE FINANCING MECHANISMS 20
KEY SUCCESS FACTORS 21
FULFILLING OBJECTIVES:
WHAT MAT TERS TO WHOM? 22
| 3
STATE OF THE INFRASTRUCTURE
GAP IN 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.
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.
1
Meeting Asia’s Infrastructure Needs. Asian Development Bank. 2017 and Bridging Global Infrastructure Gaps. McKinsey. 2016
2
Same as above. | 4
THE ROLE OF REAL ESTATE IN
INFRASTRUCTURE FINANCING
Real estate strategies are increasingly critical components of
transportation infrastructure projects such as mass rapid transit
networks, ports, airports and roads.
Real estate can contribute to the financial viability of a transportation infrastructure in two ways:
Monetisation Long-Term Operating Revenue
Capital can be raised when a real estate asset is The real estate component of infrastructure projects
monetised to finance the construction of a new helps generate long-term revenue streams to cover
infrastructure. In most infrastructure projects, a operating, financing and maintenance costs and to
significant amount of upfront capital is required to increase the project’s overall investment yield.
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
$600
$400
$200
Shortfall
$0
2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038
0 2040 2042
4 2044
4 2046 2046 2050
EBITA
Million
-$200
-$400
26 2028 2030 2032 2034 2036 2 38 2040 20 2
-$600
Upfront Periodic
CapEx Upgrades
-$800
-$1,000 IRR
IRR
-$1,200
Actual Expected
EBITA and Cap Ex Total Cost (Cap Ex and Op Ex) Infrastructure Operating Revenue by Investors
Fictional chart for illustrative purposes only
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.
| 5
Infrastructure Pro Forma (with Real Estate)
$400
Operating Revenue
$200
$0
2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2046 2050
-$200
Million
-$400
-$600
Monetisation
-$800
-$1,000 IRR
IRR
-$1,200
Without With
EBITA and Cap Ex EBITA and Cap Ex Real Estate Real Estate
(without real estate) (with real estate)
Fictional chart for illustrative purposes only
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.
Beyond the Financials: Catalyst for Urban Regeneration
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.
CASE STUDY
Rejuvenation of King’s Cross Station Square, London
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.
BEFORE AFTER
Source: Network Rail
| 6
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.
Why Real Estate Matters for Airport Authorities?
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.
3
CAPA Centre for Aviation: Global Airport Construction Database
4
Same as above. | 7
YVR Vancouver International Airport Airside vs Landside
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.
Airside
Landside 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.
Source: City of Richmond and YVR Airport
Monetisation from Real Estate
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.
| 8
AIRSIDE
Terminal Retail Terminal F&B
Changi Airport, Singapore Changi Airport, Singapore
Terminal Hotel Pay Parking Terminal Leisure & Wellness
Fairmont, Vancouver International Airport Changi Airport, Singapore Hong Kong International Airport
LANDSIDE DEVELOPMENT
Retail Business Park
Edmonton International Airport Mall Changi Business Park
Hotel Logistic / Manufacturing
Hong Kong SkyCity Marriott Hotel Dublin Airport Logistics Park
| 9
CASE STUDY
Peña Station NEXT project,
Denver International Airport
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.
Source: Peña Station NEXT
Operating Income from Real Estate
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.
CASE STUDY
YVR Designer Outlet Centre,
Vancouver International Airport
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.
Source: YVR Designer Outlet Centre
| 10Key Considerations for Airport-City Real Estate Strategy
Beyond the financials, airport real estate strategies also factor in long-term strategic and
operational considerations, including:
Land Allocation Strategy Investment/Development
Airports should carefully balance Conditions in Accordance
to Land Tenure Periods
the goal of maximising potential
revenue from real estate while Airport land across Asia is usually
reserving sufficient airside land to held on a leasehold basis, with
meet future growth requirements. tenure periods ranging from
30 to 99 years. The real estate
development strategy, including
the land pricing and development
Regional Economic conditions, laid out by Airport
Development authorities should take into
Airport should reserve land to account the land tenure and the
accommodate airport-related ability for investors to achieve
industries and economic activities viable investment yields within a
that are critical for regional reasonable timeframe.
economic growth.
Synergy Between the
Airport and City
Environmental and
Social Impact In order to be successful, “Airport-
City” strategies should complement
Potential environmental and social
– not directly compete – with the
impact should be assessed to
surrounding urban area. The airport
ensure the real estate strategy
should aim to attract investors,
do not materially impact airport
businesses and real estate assets that
operations and nearby communities.
add value to the offering and generate
Local stakeholder and community
catalyst effect on the economic
engagement should be an integral
base of the wider region. The
part of comprehensive airport city
airport authority should also ensure
development strategy to ensure it
infrastructure connectivity between
is aligned with local priorities.
the airport and the wider city.
Passenger Experience
Airport premises should provide
a retail, service and activity mix
that enriches the overall passenger
experience.
| 11RULE THE SEAS:
PORT DEVELOPMENT AND EXPANSION
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.
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- Marina Bay Cruise Centre, Singapore
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
City Terminals, Tanjong Pagar Singapore
existing cruise itineraries.
5
United Nations Conference on Trade and Development (UNCTAD). Review of Maritime Transport 2017
6
BMI Research. Markets for Growth: May 9, 2017
| 12
7
Cruise Line International Association. Asian Cruise Trends 2017Uneven Port Growth on the Horizon: Mega-Ports and Free Trade Zones
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.
Port Activity and Revenue Diversification is the Way Forward
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.
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 Logistics and Free Tourism Urban
and Storage Distribution Trade Zones (Cruise, Attractions) Land-Use
Win-Win Public Private Partnerships for Successful Port Infrastructure Delivery
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.
8
UNCTAD, Review of Maritime Transport 2017
| 13CASE STUDY
Khalifa Port Free Trade and
Industrial Zone in Abu Dhabi
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 Source: Abu Dhabi Ports
attract occupiers from a variety of economic sectors.
Strategic Considerations for Successful Port Infrastructure
Land Allocation Strategy Regional Economic Development Impact Assessment
Port authorities should carefully Based on local and regional Environmental, economic
plan for future land requirements to economic development strategies, and social impact assessment
accommodate marine-side activities port-oriented land banks should be should be an integral part
and infrastructure. Long-term land reserved to accommodate specific of port-oriented real estate
planning strategies are essential to activities/industries with a catalyst strategies, special economic
determine the type and amount of effect for local economic growth, zone schemes and free trade
non-marine development that including as part of free trade and zone initiatives.
should be permitted on port lands. special economic zones.
Urban Regeneration Opportunity Tourism Development
Due to historic reasons, port authorities often Port authorities have a significant role to play in
control a large share of prime waterfront land transforming Asian cities into attractive world-class
in the heart of major cities. With the rising tourism destinations. With the staggering growth of
value of prime land in cities and the growing the cruise tourism segment, port authorities have
space requirements of port facilities, the an opportunity to establish new tourism destinations
development of port lands can yield long-term in cities across Asia. Through comprehensive real
financial as well as urban rejuvenation benefits estate and urban regeneration strategies, port
with a well-laid out real estate strategy. authorities can develop state-of-the-art cruise
infrastructure and integrate them into highly
attractive mixed-use waterfront destinations.
| 14RAIL POTENTIAL:
MASS RAPID TRANSIT SYSTEMS
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.
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.
High Upfront Cost, Insufficient Fare Box Revenues
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.
9
Meeting Asia’s Infrastructure Needs. Asian Development Bank. 2017
10
Same as above | 15The Symbiotic Relationship of Mass Rapid Transit and Real Estate:
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”.
Transit and the Rising Property Values: the Circle Line in Singapore
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.
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:
Shopping Centre Mixed
Hotel Residential Office
/ Retail Development
Transit-Oriented Developments (TOD)
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. Clementi Mall and Block 441 A & 441B
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. | 16Land-Value Capture: Monetising the “Land Value Lift”
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 Lift Example
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.
Land-lift
(Upzoning)
Value
Creation
Land-lift Land-lift
(Transit) (Transit)
Baseline Land Value Baseline Land Value Baseline Land Value
(No Station) (No Station) (No Station)
| 17CASE STUDY
Capstan Way Station, Vancouver, Canada: Station Financing through Land-Value Capture
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.
CASE STUDY
Montreal’s REM: Regional Transit System Financing through Land-Value Capture
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.
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
Operating Revenue from Real Estate:
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
| 18CASE STUDY
The Rail + Property (R+P) Model
– MTR Corporation, Hong Kong
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.
Land Acquisition
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.
| 19Key Strategic Considerations for Mass Rapid Transit Systems
Finance and Quality Land-Use Policy Aligned
of the Built Environment with Market Potential
Proposed developments around a When a new mass rapid transit is
mass rapid transit station should not built, the allowable density, land-use,
be planned merely for their financial form of development guidelines,
potential. Their development concept site coverage ratios and other
should balance the opportunity development parameters should
for asset monetisation with the be revisited and assessed against
potential to create an attractive market potential, including the
urban destination. The creation of a opportunity for monetisation toward
vision and planning guidelines early infrastructure financing. Land-use
on is an important consideration, policy should align with the transit-
especially for transit-oriented orientated function of the area and
developments. the market development potential
around the station.
Reasonable Developers' Certainty on
Contributions Timeline and Costs
Developers' contributions required Real estate development projects
by the authorities toward the around mass transit infrastructure
infrastructure delivery cost should have to factor in potential
be set at a level that does not uncertainties such as the exact
significantly increase risk and timing of the infrastructure delivery
that maintains the overall financial and the long-term operating costs
viability of the project. The financial associated with the location. The
contribution should factor in the government and infrastructure
level of risk and uncertainty that authority should provide certainty
come with the delivery of a long- and legal guarantees to the private
term infrastructure and real estate sector partners on the timeline of
programme such as shifting market the infrastructure delivery and the
conditions, rising construction and future taxation and cost-sharing
financing costs, construction delays, scheme associated with the location.
etc. Requiring contributions that are
too high can undermine the financial
viability of the project from the
developers' perspectives.
| 20RECAP: INFRASTRUCTURE-RELATED
REAL ESTATE FINANCING MECHANISMS
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.
Development, Lease and Hold: 100% Ownership
Government or infrastructure authority develops and
Aggressive Risk retains full ownership of income-generating real estate
and Return assets. Potential revenues, costs and risks are fully
borne by the government or infrastructure authority.
Development Joint-Venture
Government or infrastructure authority partners Development Rights (lease)
High Risk with private developer in a real estate project. Government or infrastructure authority
and Return The asset can be leveraged or monetised once leases the development air rights of a
developed. The revenue, costs and risks are given site in exchange for long-term
shared between the government / infrastructure periodic lease payments.
authority and the private sector partner.
Development Rights (sale)
The sale of development air rights above stations, depots, terminals and Land Transfer / Land Swaps
other infrastructure. Depending on the market, location and land ownership
Medium Risk Infrastructure right-of-way
policy, air rights can be sold under a freehold or leasehold tenure.
and Return land is exchanged for more
valuable land with development
Prepaid ground lease for a limited time period (typically 30 to 99 years) for
potential, serviced by or near
development sites located around the infrastructure. Ground leases are a
to infrastructure.
way to monetise development rights while retaining long-term control over
the land base.
Land Value Capture Development Agreement
Turn-Key Delivery Agreement
A share of the real estate value Government or infrastructure
Infrastructure or amenity is
creation is captured toward the authority enters into a long-term
Low Risk financed, built and delivered
cost of an infrastructure. Land- agreement with a private developer
turn-key by the developer to
and Return value capture is usually achievable to build, own and hold a revenue-
government and/or owner in
through changes in land-use policy generating real estate asset. The
exchange for development
(increased allowable development agreement can include fixed lease
rights or planning permission
density and introduction of new payments or a share of the asset’s
for a new development.
land-uses). operating income.
Development Impact Tax Special Assessment
Government or infrastructure and Special Tax Districts Tax Increment Financing
Least Risk authority levies a per build area Local property tax increment
Property tax surcharge
fee from developers to cover linked to the financing costs of the
and Return introduced in certain areas
the costs associated with local infrastructure. The tax is usually
to reflect the local benefits
infrastructure upgrades to levied on both existing real estate
of a new infrastructure or
accommodate a new development properties and new developments.
other local area improvement
(sewage, road, water pipes,
initiatives.
access, etc.)
| 21KEY SUCCESS FACTORS
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.
Market Opportunity Valuation
There should be a market opportunity Real estate development partnerships,
for new real estate assets at or joint-ventures and other agreements
around the infrastructure. Without the require independent fair market valuation
market opportunity, the real estate of the development land and other real
asset can become a liability. 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.
Land-Use Policy Market-Ready Product
Land-use policies and planning The proposed size, location, concept
regulations should reflect the highest and specifications of the real estate
and best-use development potential asset project must meet the industry’s
on and around infrastructure land. business and operational requirements.
Competitive Market Pricing Legal Agreements and Dispute
Resolution Mechanisms
Land and property at or around
transport infrastructure may be Given the complexity of infrastructure
considered prime real estate, but projects and the variety of stakeholders
lease rates and sale prices should involved, clear and thorough legal
remain competitive in the broader agreements between government,
market. If the asset commands a government, the infrastructure
price premium due to its location, authority and the real estate asset’s
the business reasons and value-add developers, operators, tenants and
should be made clear to private occupiers are essential.Comprehensive
sector partners and occupiers. dispute resolution mechanisms should
be put in place from the outset.
Reasonable Win-Win Conditions Government Regulation
and Legal Framework
The conditions stated in the real estate
strategies and financing mechanisms A robust government regulation
should be fair, reasonable and and legal framework should be in
favourable to all parties and be based place to ensure the transparency,
on independent review of market implementation and enforcement of
conditions and the expected financial legal agreements, financing mechanisms
performance of the asset. and land-use policy amendments.
| 22FULFILLING OBJECTIVES:
WHAT MATTERS TO WHOM?
Stakeholder Priorities
> Public Benefits: Economic development, job creation,
tax revenue, environmental and social sustainability
Government
Agency > Limited government subsidies and financing
> Positive public opinion and feedback
> Rapid development and planning approvals
> Project financial viability
Real Estate > Investment yield: Return on investment (ROI)
Developer and Internal rate of return (IRR)
> Project marketability
> Long-term capital value appreciation
> Investment yield: Return on investment (ROI)
and Internal rate of return (IRR)
> Infrastructure revenue (ridership, fare box
Infrastructure revenue, aeronautical revenue, etc.)
Investor > Revenue diversification
> Risk management
> Sustainable operating and maintenance costs
> Project financial viability
> Investment yield: Return on investment (ROI)
and Internal rate of return (IRR)
Financial
Institution > Operating revenue and cashflow
> Revenue diversification
> Risk management
> Public benefits: Economic development, job creation,
tax revenue, environmental and social sustainability
Multi-Lateral
Development Bank > Capacity building
> Transparency and accountability
| 23CONCLUSION
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.
| 24Our Specialists
in the Region
JONATHAN DENIS-JACOB
Associate Director
Valuation and Advisory Services
Singapore
Jonathan.Denis-jacob@colliers.com
AMIT OBEROI
Executive Director
Infrastructure Consulting
New Delhi
Amit.Oberoi@colliers.com
DAVID FAULKNER
Managing Director
Valuation and Advisory Services
Hong Kong
David.Faulkner@colliers.com
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