M&G Real Estate forges ahead with US$1.8 bil deals in Asia Pacific amid uncertainty
By Cecilia Chow
/ EdgeProp Singapore |
The main entrance of the new Surbana Jurong campus, which obtained temporary occupation permit in April this year (Photo: Samuel Isaac Chua/EdgeProp Singapore)
SINGAPORE (EDGEPROP) - With its imposing fortress-like facade and main entrance, the Surbana Jurong campus looks like the headquarters of a Marvel superhero. It gives little hint of the soaring glass atrium and indoor gardens within. The new global headquarters of the government-linked infrastructure and urban development consultancy was designed by Safdie Surbana Jurong, a collaboration between Safdie Architects (immortalised by the designs of Marina Bay Sands and Jewel at Changi) and Surbana Jurong.
Surbana Jurong Capital, the investment arm of Surbana Jurong, developed the campus with 100% forward funding by M&G Real Estate. A develop-and-lease agreement was signed by the two parties based on a transaction value of $400 million in January 2019. The campus is valued at $426 million as of the end of March.
Under the develop-and-lease agreement, Surbana Jurong is the master lessee of the whole campus. “We have a 30-year lease agreement with them,” says Richard van den Berg, M&G Real Estate Asia Property fund manager. “They will initially occupy part of the campus, grow into the building, and sublease the remainder.”
M&G Real Estate is the property investment arm of London-based M&G, a global investment manager listed on the London Stock Exchange since its de-merger from Prudential in October 2019. As at end-December 2022, M&G Real Estate’s total assets under management amounted to GBP32.8 billion ($55 billion).
The Surbana Jurong campus marks M&G Real Estate’s first business-park office investment in Singapore (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Maiden business park investment
The Surbana Jurong campus marks M&G Real Estate’s first business-park office investment in Singapore. The 742,000 sq ft campus has 10 blocks of five to seven storeys with 487,200 sq ft of business park space; 22,000 sq ft of F&B, childcare centre and clinic; 27,480 sq ft of internal gardens; and 114,200 sq ft of outdoor landscaped gardens connected to Jurong Eco-Garden. When fully operational, the campus will cater to 3,000 employees.
Fitted with solar panels, smart lighting and underfloor air-distribution systems, it has attained the BCA Green Mark Platinum certification for a Super Low Energy Building, the highest sustainability and energy efficiency rating. The development obtained its temporary occupation permit in April.
Situated on a 308,923 sq ft greenfield site, the campus is the flagship development of the Jurong District Eco-Garden within CleanTech Park; and part of the Jurong Innovation District, an ecosystem for enterprises in advanced manufacturing, urban solutions and smart logistics.
The campus is “well-positioned to benefit from government-driven initiatives to develop high value-adding industries in this new business district”, says van den Berg.
The regional headquarters of Jardine Cycle & Carriage at 239 and 241 Alexandra Road was one of a portfolio of buildings M&G Real Estate acquired for $333 million in a deal completed in February (Photo: M&G Real Estate)
From business parks to car showrooms
Last October, M&G Real Estate acquired four car showrooms in Singapore from Jardine Cycle & Carriage (Jardine C&C) in a sale and leaseback agreement. Annual income is estimated at $25.9 million for the next 10 years. M&G Real Estate was selected “through a competitive bidding process”, with CBRE as the marketing agent.
The aggregate transaction value of the Cycle & Carriage portfolio is $333 million, based on caveats lodged with URA Realis on Feb 14. The four properties are Jardine C&C’s 201,057 sq ft regional headquarters at 239 and 241 Alexandra Road ($142 million); the seven-storey Mercedes Benz Centre at 301 Alexandra Road ($131 million); the 356,803 sq ft industrial complex at 209 Pandan Gardens ($46 million) in Jurong; and a two-storey facility at Pandan Loop ($14 million), off West Coast Highway.
Jardine C&C’s regional headquarters at 239 and 241 Alexandra Road sit on sites zoned for use as multi-user factories with a 99-year lease from 1956. The Mercedes Benz Centre has a 99-year lease from 1948 and a single-user factory zoning. Meanwhile, the property at Pandan Gardens is also zoned for use as a single-user factory, with a 30+30 year lease from 1978. The single-user factory at Pandan Loop has a 30+30 year lease from 1979.
“The Cycle & Carriage portfolio provides diversification and a robust income with an annual step-up over a long lease from a high-quality tenant,” says van den Berg. He adds that acquiring the portfolio as part of M&G Asia’s core property strategy “makes sense over the long term”, especially in the current uncertain market conditions.
Compass One shopping mall which M&G owned a majority stake of 81.01% in 2002 and acquired the remaining 18.99% from Frasers Property in December 2015 $80.3 million before undertaking a $60 million revamp of the mall (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Suburban retail mall integrated with transport hub
More than 15 years before its deal with Surbana Jurong and Jardine C&C, M&G Real Estate took an 81.01% stake in the former Compass Point in 2002. Located in Sengkang, it is one of the first suburban retail malls in a mixed-use development integrated with a transport hub.
In December 2015, M&G Real Estate became the sole owner of the retail mall after acquiring the remaining 18.99% stake from developer and joint-venture partner Frasers Property for $80.3 million. It pumped in $60 million in an 11-month revamp and reopened the mall in September 2016 as Compass One. The new mall boasts an increased net lettable area of 272,881 sq ft (from 269,546 sq ft previously) and 208 shops (up from 126 shops before).
“Compass One is a very strong performer within the strategy [fund], both from an income and total return perspective,” says van den Berg. “With a 100% ownership of Compass One, we do not have any immediate plans to increase our exposure [in Singapore retail] further.”
van den Berg: The lesson for us from the past few months is that no market is immune to inflationary and interest rate pressures (Photo: M&G Real Estate)
Conservative stance
Since January 2022, M&G’s core strategy fund has invested US$1.8 billion ($2.43 billion) in gross asset value in Asia Pacific. It has focused on five markets — Australia, Hong Kong, Japan, Singapore and South Korea.
“The lesson for us from the past few months is that no market is immune to inflationary and interest rate pressures,” says van den Berg. Hence, M&G Real Estate has become more conservative in managing its debt levels and covenant clauses.
“We started early with refinancing existing loans and have an average maturity of around four years,” he adds. “Only a few loans are maturing over the coming year. We have also increased our interest rate hedging, now around 80% of our loan portfolio.”
Despite challenges such as higher interest rates, inflation, cap rate compression, trade and supply-chain inefficiencies, Asia Pacific’s real estate markets have been less affected due to the region’s underlying robust economic growth, says van den Berg.
Over the past 18 months, M&G Real Estate has increased its exposure to logistics and residential sectors in the region while selectively upgrading the quality of its office portfolio.
“As long-term investors, we believe businesses will stabilise in Asia Pacific, especially since we are recovering in regional and global trade and supply-chain efficiencies,” he adds. “As a core strategy, we only invest in sectors with a proven track record and deep liquidity in both up and down markets.”
In January, M&G Real Estate paid JPY34 billion to increase its stake in ESR Ichikawa Distribution Centre in Greater Tokyo Area to 58.3% from 25% in 2021 (Photo: M&G Real Estate)
Investments in logistics, multi-family assets in Japan
Van den Berg is optimistic about the resilience of the logistics sector across Asia Pacific over the long term. “Logistics demand continues to benefit from steadily rising e-commerce penetration, supported by population growth and sizeable investments in transport and infrastructure,” he asserts.
January saw M&G Real Estate Asia become a majority shareholder in the fully-leased ESR Ichikawa Distribution Centre in Ichikawa City, located in the Greater Tokyo Bay Area. M&G Real Estate acquired a 33.3% stake in the 2.165 million sq ft, state-of-the-art logistics facility for JPY34 billion ($329 million), raising its stake from 25% in 2021 to 58.3% today.
In the current regime of higher interest rates and inflation, M&G Real Estate has to reposition its portfolio for growth and inflation protection. “Historically, in a period of healthy wage increases and healthy inflation, the multifamily sector tends to do relatively well,” says Regina Lim, head of property research Asia, M&G Real Estate. “Hence, we like the residential rental market for its resilience, low vacancy and stable rental growth.”
One of a portfolio of 30 residential assets with 1,575 apartments in Japan's gateway cities of Tokyo, Osaka and Nagoya that M&G Real Estate acquired from Blackstone in March 2022 for JPY49.2 billion (Photo: M&G Real Estate)
M&G Real Estate’s biggest portfolio purchase in the multifamily sector was the acquisition of 30 residential assets in Japan’s gateway cities of Tokyo, Osaka and Nagoya from Blackstone in March 2022. The total purchase price for the portfolio with 1,575 apartments was JPY49.2 billion. The acquisition substantially increased M&G Asia Property Fund’s assets under management in the sector to JPY109.3 billion.
The investment firm’s earlier multifamily acquisitions in Japan included the 2018 purchase of a portfolio of residential buildings in Chiba, Fukuoka and Osaka for US$83.7 million; and the acquisition of two Osaka residential buildings in May 2021 for US$50 million.
“The residential rental market in Japan is well established, and we will continue to invest in Japan,” says Lim. “The other growing market is Australia’s build-to-rent (BTR) sector, which we have invested in, and will continue to invest.”
Artist's impression of the 173-unit apartment project in Melbourne's Arts precinct, Novus on Sturt, the seed project for the Novus Built-to-Rent Trust that M&G Real Estate owns a 95% stake in (Picture: M&G Real Estate)
Investing in built-to-rent in Australia
M&G Real Estate expanded its residential rental investments into Australia in April 2022. It committed A$450 million ($404 million) to a partnership with Australian developer Novus for a 95% stake in Novus Build-to-Rent Trust. The trust will develop a portfolio of multifamily properties in key Australian cities, focusing on Melbourne and Sydney.
The trust is seeded with a 173-unit apartment project in Melbourne’s Arts precinct, Novus on Sturt. The investment was made on behalf of M&G Real Estate’s Asia Property Fund.
Built-to-rent residential market offerings in Japan and Australia remain “a good risk-adjusted reward”, says van den Berg. He also sees the “emergence of residential for lease” in other regions.
Policy rate hikes in Asia Pacific have been less pronounced than in the US, but markets like Australia and South Korea have been more aggressive, with rate hikes of 300 and 225 basis points last year, notes Lim. “However, real estate values have weathered this well.”
According to Lim, the rate hikes in South Korea could lead to residential rental investment opportunities. Historically, apartments in South Korea were sold off-plan, similar to Singapore, Hong Kong and even Australia. “But this trend is getting disrupted, partly because of the higher interest rates,” she says.
With developers in South Korea unable to pre-sell their residential projects, some may face refinancing issues. The mounting inventory of uncompleted and unsold stock could also mean “an opportunity to buy and rent them out in the next 12 to 24 months”, Lim reckons. “This is quite similar to how the BTR sector started in Australia.”
Lim: Historically, in a period of healthy wage increases and inflation, the multifamily sector tends to do relatively well (Photo: M&G Real Estate)
‘Strategic calls’
The residential rental market in Singapore is “too small”, Lim laments. “Most Singaporeans and permanent residents are incentivised to own property as the Central Provident Fund (CPF) can be used towards a home purchase and mortgage payments,” she adds. “CPF cannot go towards rental payments. So the residential rental market is not scalable.”
Another challenge is the Singapore government’s regulatory measures to stabilise the housing market. “They don’t want prices to go up too fast,” says Lim. “As a long-term investor, we will be pretty cautious about markets with a lot of intervention.”
The prevailing uncertainty about how long interest rates will stay elevated has created divergent views between asset buyers and sellers. “Even though we have the capital to deploy and purchase assets, we don’t want to buy at the wrong time; sellers who want to offload assets are cautious as they don’t want to sell at the wrong time,” says Lim. “This uncertainty creates a mismatch in buyers’ and sellers’ price expectations.”
According to van den Berg, M&G Real Estate laid out “several strategic calls” earlier last year. “They will guide our global portfolio to be resilient during these times,” he says.
“M&G is committed to the growth in Asia Pacific and in the five key markets of Australia, Hong Kong, Japan, Singapore and South Korea, where we have been very active,” he adds.
Check out the latest listings near Surbana Jurong campus, Compass One
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