PERE Asia Summit 2023: Highlights and Insights

Industry leaders, institutional investors and global real estate fund managers recently gathered at the 16th PERE Asia Summit in Singapore to explore the sector’s latest trends, opportunities, and challenges.

Attendees heard about a broad range of topics including post-pandemic market dynamics and the outlook for APAC, capital flows and investment strategies, regional hotspots, and how sustainability, ESG and climate change have risen up the agenda to drive decision-making.

Several of MRI Software’s APAC team attended, and we’ve compiled key takeaways from some of the event’s most thought-provoking keynotes and panels.

Keynote panel: In it to win it – Leading investors deliver on ESG promises

Moderator Stella Saris Chow of ANZ began by observing a shift over the past three to four years from basic sustainability reporting and cost of implementation concerns to a genuine appreciation of ESG and its benefits. “We’re now at ESG 2.0,” she said “and you see many investors and real estate developers having very detailed ESG strategies that are starting to drive value.”

Sabine Schaffer of Pro-invest drew from the group’s decade of experience in ESG to reflect on what it takes to achieve “best in class” performance.

“What’s evident to us is if you really want to be successful in ESG, you need to have a holistic approach that covers the entire value chain,” she said, explaining that this includes everything from the management of a construction site to the design of a building to the control of energy consumption and waste.

And these sorts of measurable gains aren’t the only drivers. As Schaffer pointed out, financial benefits and backing will ultimately flow to the investors and operators who take ESG seriously,  in the form of green loans and similar initiatives.

Brad Docsker of Green Generation echoed Schaffer’s observations about both the broader scope of ESG and how it affects access to capital. “Now we’re in a world where ESG is about your employees. And your customers. It’s about your supply chain, your mutual funds, your debt capital markets, the planning officials (right down to the) citizens where you have buildings.”

“Capital markets are now demanding more (in terms of) ESG,” he added. “So, in many cases, you’re not able to raise money because the LPs, the consultants, they’re simply saying, “no, don’t come to us without an ESG strategy”.”

The question, Dockser argues, is how to bridge the gap between strategy and execution. Clients increasingly want to see “asset-level results” and are being more proactive in making them happen. They realise that “If you do it right, there’s a lot of value in it.”

John Pattar of KKR applied country-level comparisons and agreed that while ESG had risen in terms of importance, there is still a way to go in some markets. According to Pattar, Canada, Japan, Australia and Singapore are following a path of deep decarbonisation and have a high percentage of green-compliant buildings.

“But SE Asia isn’t going that way,” he said. “India, Indonesia and Vietnam (where a lot of people are relocating their businesses to outside China) aren’t following the rules and regulations because they feel it’s too expensive.”

But you only have to look at Japan, Pattar said, to see the benefits to your bottom line of “doing green”. “I think what Japan has proven is that it does directly benefit in terms of rents achieved, because you see a premium on green rents going up by about 10% (and) they’ve cut the cost of borrowing by about 30 basis points.”

Elaine Tsung of Activated Asia underlined the importance of connecting the ESG mission of a project to the needs of end users. She said this involves asking “how you’re going to continue engaging with people so that your ESG initiatives are both impactful and sustainable in the long run.”

Panel: Investment opportunities in Australia

David Green-Morgan of MSCI led panellists in considering some of the challenges and opportunities of investing “down under” in the current climate and asked whether, as previous cycles had shown, niche sectors were suffering from a retreat of capital into core investment profiles.

Jemma Maddick of Dexus countered by saying “We’re still seeing really strong demand for healthcare and other alternatives as well. Population growth in Australia, migration, and an ageing population are all contributing factors.”

Green-Morgan asked Suzannah Morrison whether off-shore market turbulence, particularly in Europe and the UK, was leading Aware Super to invest more money domestically.

“We have 70% of our portfolio in Australia and 30% offshore (US and Europe),” she said. “Within Australia, we’re looking into the opportunities in multi-family and industrial. We will still focus on Europe because uncertainty also means that there are opportunities. In Europe, we’re looking into the industrial space and servicing more niche sectors.”

According to Jan Smits, Pro-invest’s broad hotel asset portfolio in Australia and New Zealand gives it a clear view of that particular market. He confirmed that the hotel industry is resilient, as demonstrated by the way it bounced back from past setbacks like the GFC and, in recent years, from COVID.

The biggest squeeze has been at the luxury end of the market, but “The recovery has been phenomenal,” he said. “This has been largely driven by domestic demand but now the business and corporate market is starting to come back as well.” “Quality” and “ESG-driven” assets will perform particularly well, Smits added.

Bastian van Halder of Realterm spoke about logistics assets and said “We have a very bullish view of Australia as a structural economic driver in supply chain real estate.”

“We’ve seen a huge boom in our subset of industrial assets by virtue of e-commerce and population growth, with those fundamentals being exceptionally strong in Australia.”

“Not only are you seeing an increase in the net migration coming into the country, but you’re also seeing an increase in the number of households and a shift in where those households are moving to.”

The western suburbs of Melbourne and western Sydney are receiving huge population inflows, and van Halder believes these areas represent the future of the Australian supply chain’s distribution network.

Investor Panel: Global institutional investors discuss allocating capital during inflation, recession and rising interest rates

Nadeane John, MRI Software‘s Industry Principal – Strategic Planning, APAC, led a panel discussion on strategies for allocating capital in uncertain times. She was joined by leading investors, George Agethen of Ivanhoe Cambridge, Jiroo Eoh of ABL Life Insurance and Stephen Tross of Bouwinvest Real Estate Investors.

Here’s how panel members responded to the series of questions posed by John:

With interest rates and inflation rising, and recessions looming, what do you see as the biggest challenges facing the real estate market?

Agethen mentioned the unpredictability of inflation, interest rates, and cap rates as being the most pressing investment concerns and added, “On the asset management side, challenges with valuations are certainly impacting our investment intentions,” along with the fact that “it’s not necessarily the best market to exit in.” On top of this is the importance of improving portfolios for better ESG.

When it comes to capital allocation, how are you changing your investment decisions based on what’s happening at the moment?

Tross spoke about having strategies that focus on “Using low leverage in our international portfolio, investing with the best operating partners who mitigate risk on the ground and, finally, by investing in all kinds of different structures from joint ventures, club deals, closed and open hands all the way through to listed.”

Athegen added, “We’re certainly very focused on finding investments where the income would track inflation. At the moment, that’s happening more in the alternative sector or with highly operational assets, as opposed to something that’s very stable, very core, that is losing value.”

How do you see the risk profile of the real estate market at the moment and what steps are you taking to mitigate risks?

Tross advocated for having a long-term investment strategy that can weather short-term interruptions. For his business, that involves investing in “sustainable metropolitan areas where people want to live, work and play for the longer term, supported by strong demographical shifts, strong supply and demand, and all with a very high focus on the sustainability aspect.”

On the flip side, the macroeconomic climate also means that we are ripe for some big opportunities. So what do you see as those emerging opportunities?

Eoh said, “While it’s important for us to invest for the long term, we (see current opportunities) in recycling capital for a short-term strategy, particularly in the real estate debt sector. Due to the credit crunch, it will provide a higher return which is good for liquidity.”

Tross spoke of seizing opportunities in the now more attractively priced listed markets, in the mezzanine space (where it’s possible to get a similar return to equity investments but with more downside protection) and through top-ups where investors need liquidity and want to get out of structures at substantial discounts.

Certain industries or investments are particularly vulnerable at this point in time. What are they and what kinds of strategies would you employ to deal with risk?

Athegen observed that obsolescence comes with the territory of real estate investment and said, “Where we see it now is on the sustainability side, with assets that might be stranded. Retail has gone through that revolution and it’s not ended yet.”

“The office is our biggest challenge today with working from home and flexible working preferences. (We need to) adjust for its lack of liquidity by (shifting) our allocations and trying to get as much diversification as we can.”

Lately, investment firms are going down the route of strategic partnerships. Why are we seeing these kinds of partnerships prevailing more and more?

For Athegen the reason for actively pursuing joint ventures lies in diversification as long as there’s a common vision for finding and tackling market opportunities.

Eoh spoke about the importance of being selective with appointing managers in markets outside Korea where the business has exposure. Building relationships, and committing capital, involves a long-term process of trust building.

How is ESG now playing into capital allocation decisions?

According to Tross, “There’s already a lot of evidence showing that sustainable investments outperform unsustainable ones, and that will only accelerate in years to come.”

Keynote panel: Mapping the next decade of property investing

“One key takeaway from this Asia Summit is that interest in the ‘living space’ is huge and there will be further evolution in this sector in the near future, supported by private equity.”

Terence Tang, CEO, Atelier Capital Partners

Chris Pilgrim, Managing Director of Global Capital Markets for Asia Pacific at Colliers chaired a panel looking at the future landscape of real estate investing, and how social and economic trends might shape activity in different markets and sectors over the next ten years.

In his first question, Pilgrim asked about the future of investment decision making.

According to Frank Garcia of (US single-family investor) Pretium, “The investment decision process has gotten more and more challenging, there’s a lot more factors to take into account (and) the fear for investment managers is that you get caught with dysfunctional investments that you can’t get rid of.”

Alongside this has been the rise of e-commerce and COVID which have created “value destruction” for both the retail and office sectors.

Sophie van Oosterom of Schroders Capital agreed that the investment landscape is much more complex and said “It’s not no longer about signing a lease contract for 10 years and sitting back and collecting the rent.” You need to have much deeper operational involvement and ”run every asset as a business in itself.”

Moving to sector-specific predictions, Peng Wei Tan of Blackstone pointed to the growing trend in the multi-family asset class and said that outside of the US, Japan was leading the field in a very dynamic market with 95% occupancy rates and lots of large institutional players. Activity in China and Australia is on the rise but, in both countries, the market is still in its infancy.

Van Oosterom added that in Europe more institutional investors are weighing up the pros and cons of multifamily, mulling over the tax consequences and the varying regulatory regimes that apply across Europe.

Garcia pointed to the increased demand in other residential sub-categories like seniors housing, student housing and single-family rentals and spoke about the challenges of being involved on an operational level.

Tan suggested that hotels are now experiencing a post-COVID turnaround, and although the pace of recovery is more advanced in some markets than others, Blackstone is generally “very bullish on the travel and hospitality sectors”. He added that travel activity amongst the growing middle classes in China and India will likely create a massive opportunity in the coming decade.

However, Devin Chen of PIMCO cautioned about how volatile the underlying cash flow of hotels can be. “The biggest area of focus for us in terms of hotel operations is labour costs and productivity of labour. Labour costs are through the roof (up by 15%) and margins are under pressure.”

Pilgrim mentioned that Blackstone was ”leading the charge” in some of the emerging sectors like health care and senior living and asked whether it had other alternative assets in its sights. Tan identified data centres, life science assets and student accommodation as possibilities but observed that “there are only certain pockets and countries where you can really invest and get scale.”

The panel also considered the post-COVID “return to office” and how it was likely to play out globally over the next decade. While Asian office workers have returned in much greater numbers, western countries are still playing catch-up with occupancy rates. In general, the gap is likely to widen between “Grade A” office stock and “Grade B commodity offices” with fewer cutting-edge amenities and ESG/green credentials.

Panel: Unpacking the complexities of investor-manager relationships

Joyce Lo, Director of Private Capital Advisory at Lazard, chaired a panel of participants from major LPs, asking them about their evolving investment preferences and what sorts of manager relationships they’re prioritising in the current market. She began by asking LPs what their current focus was in terms of regions or markets.

Doug Cain of Future Fund said its main regional focus is on Japan and potentially Korea.

Catherine Hong spoke about how market distress led Morgan Stanley Investment Management to move on US hotel properties and said that it was also interested in the life sciences and logistics markets, specifically in Asia, where there are extensive supply constraints. She said while “certain parts of the world are shying away from China for a variety of political reasons”, it’s impossible to ignore the many promising assets (particularly in industrial, for example) the country boasts.

Graeme Torre of APG Asia echoed Hong’s sentiments on China, saying “We have, by any measure, an under-allocation to China in our portfolio. It’s by far the biggest economy in the region and the second biggest in the world.”

Torre added that, as a thematic investor, APG had specific focus areas running through its global portfolio. These currently include urbanisation, demographics, technology, the sharing community, multifamily and last-mile logistics.

Lo also asked the panel their thoughts on whether an Asian investment strategy should be country-specific or thematic, or lean more toward a pan-Asian approach.

Cain said that Future Fund would most likely shy away from a pan-Asian strategy unless it was sector-specific and something the fund could get significant scale with.

Hong said that Morgan Stanley was more likely to back pan-regional managers in Asia than in the US or Europe, where it was more likely to favour sector specialists.

Lo then turned to the topic of limited resources and asked how LPs filtered the opportunities coming across their desks.

Cain said that for Future Fund, the expertise of managers and “showing a pathway to achieving scale” is really crucial.

For Torrre, it’s about finding partners that align with APG’s thematic approach and “who can help us invest money into the sectors within those themes.” Providing a “programmatic approach” is key, he said, “so we don’t have to reinvent the wheel every time we want to put more money into the market.”

Other than managers’ track records and returns, what other things are LPs putting emphasis on?

The panel were united on the idea of diversity among management teams being crucial, and Hong pointed out that ESG is no longer a “nice to have” but has now been thoroughly integrated into the firm’s process over the past five years.

Succession planning, as well, is absolutely essential according to Torre, who says, “We can’t rely on people being there forever, so we rely on our partners having succession planning in place and may even have a ‘key man clause’ in agreements.”

Why is it so hard to negotiate agreements between managers and LPs, Lo asked?

According to Torre, whether it’s a JV or club deal, the same issues crop up, like the hurdle rate, promote or the terms of a “the bad boy clause” where reputational risk is involved and a program needs to be stopped or the mandate taken away.

And finally, what about conflicts of interest?

According to Torre, they’re most likely to occur where you have a manager as a developer operator who puts in around 25-30 % capital. “They’re not quite a full joint venture partner, but they are not just a co-investor, they have substantial capital involved,” he says.

“Conflicts of interest arise because the manager has made a significant investment and wants to be treated like a joint venture partner, but at the end of the day, they’re still taking a fee off the other investors so they have a fiduciary duty at the end of the strategy.”

Panel: Managing climate risk – Too hot to ignore

“Success in the face of a climate crisis relies on identifying opportunities and acting upon these challenges with scalable and practical solutions. This is the only way to achieve net zero at an accelerated rate. We are active players, using our global reach and enterprising culture to quickly apply new technologies that will impact meaningful progress in buildings around the world.”

Lisa Hinde, Head of Sustainability, Real Estate Management Services, Colliers

Bill Schwab, CEO of LCI Investment Company chaired a panel on identifying and integrating climate risk into investment decision-making and how investors are implementing commitments to sustainability. He started by asking what the current data is showing us and how people are reacting to it.

Dennis Wan, CDP‘s head of capital markets for the region, said CDP’s massive environmental database gives it a unique perspective on climate risk and the built environment. “Over $1 trillion of risk exists from climate change, but at the same time, over $2 trillion of opportunities exist in adapting to it. That’s a pretty simple equation, especially for a roomful of investors,” he suggested.

Aleksandra Njagulj of DWS said that there were fiduciary and risk-related responsibilities, as well as physical ones. She said investors need to work out “From a traditional (financial and risk) point of view, how well assets are performing and how resilient they are to regulatory and market changes. And from a physical point of view, are these buildings adaptable and are they going to be able to function in extreme circumstances?”

Joanne Khew of Eastspring Investments referred to the IPCC report on the challenges of containing the temperature increase to a target of two degrees and said that adaptation (as well as mitigation) will be critical, especially for portfolios in high-risk areas. Risks and costs need to be carefully measured, for buildings themselves and also along the supply chain. “We need to look at materials innovations and who is going to absorb costs – who will pay a ‘greemium’,” she said.

Njagulj said that while work is being done on pricing risk, a lot more thought is required on “How valuations are addressing vulnerabilities of buildings, and whether green premiums or brown discounts are accurately representing the risk or opportunities of buildings.”

Khew agreed that while investors and asset managers can choose from a wide range of certification and assessment methods to benchmark their portfolios (all of which are useful in their own way) the industry is crying out for a more harmonised approach to gathering asset-level data, and making better projections and impact models. All of this will lead to being able to channel capital better.

The panelists agreed that ESG now goes hand in hand with financial returns and that investment in green buildings and climate-resilient buildings is paying off already.

As Khew said, investors will have to think very carefully about whether they want to buy a sub-optimal building today and hold that in their portfolio. “Is that risk worth it? On the flip side, if you are buying a building (with secure) climate and ESG credentials, that’s something you can be assured will generate continual value over time.”

Michelle Farrell of IFC noted that many asset managers are already on board and that a big area of growth is in large portfolio owners wanting to “green all of their portfolio”. A large number are engaging in major zero-carbon or decarbonisation planning programs as a result.

She said that IFC’s 2021 ESG report found that “(Out of) 656 companies in our portfolio, those with good environmental and social results outperformed those with poor results by 210 basis points on return on equity and 110 basis points on a return on assets. So this is a proof of concept that it can work it can be profitable.”

Farrell believes that educating the market on the benefits of green investments will help them see that the payback period is not as long as people think, nor does complying cost as much.

“If we start at the beginning. If we make the right design choices. If we (make the right tools) part of our practice or design standards, then we can truly make this transition without it having to be as painful.”

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