Despite the uncertainty, M&G Real Estate forges on with US$1.8 billion in deals in Asia Pacific

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With its fortress-like, imposing facade and main entrance with its fortress-like facade, the Surbana Jurong campus looks like the home of an iconic Marvel superhero. It doesn’t even hint at the impressive glass atrium and the indoor garden within. The new headquarters for the state-owned consulting firm for urban and infrastructure was created with the help of 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 division of Surbana Jurong, developed the campus using 100% in-transit funding from M&G Real Estate. A develop-and-lease contract was signed by both parties based on a deal that was valued at 400 million dollars in the month of January. The campus was estimated at $426million as of close of March.

In the development-and-lease contract, Surbana Jurong is the master lessee for the entire campus. “We have a lease for 30 years agreement with Surbana Jurong,” says Richard van den Berg, M&G Real Estate Asia Property manager of the fund. “They will initially lease a portion on the property, then expand into the structure, and sublease the remaining.”

M&G Real Estate is the property investment division of the London-based M&G, a leading global investment manager that is listed at the London Stock Exchange since its merger with Prudential in October of 2019. By the end of December 2022 the total amount of assets managed by M&G Real Estate amount approximately GBP32.8 billion ($55 billion).

Maiden Business Park investment
Its Surbana Jurong campus marks M&G Real Estate’s very first business-park office development in Singapore. The sprawling 742,000 square feet campus includes 10 blocks ranging from five to seven stories comprising 487,200 square feet of commercial park space with 22,000 sq ft of F&B, a childcare centre as well as a clinic. There are 27,480 square feet of gardens inside as well as 114,200 square feet of gardens with outdoor landscaping that connect to the Jurong Eco-Garden. Once fully operational the campus can cater to the needs of 3,000 employees.

Equipped with solar panels with smart lighting, as well as underfloor air distribution systems, it has earned it the BCA Green Mark Platinum certification for the designation of a Super Low Energy Building, the most sustainable and energy efficiency rating. The project was granted its permanent occupation license in April.

The campus is located on a 308,923 square feet greenfield site The campus is the most prominent creation of Jurong District Eco-Garden in the CleanTech Park as well as a an integral part of Jurong Innovation District, an area of excellence for businesses that specialize in modern manufacturing, urban solutions and intelligent logistics.

It is “well-positioned to take advantage of government-led initiatives that aim to build high-value industries in the new business district” van den Berg says. van den Berg.

From car parks to business parks showrooms
In October, M&G Real Estate acquired four showrooms for cars located in Singapore by acquiring Jardine Cycle & Carriage (Jardine C&C) through an agreement for sale and leaseback. The annual revenue is estimated to be $25.9 million over in the coming 10 years. M&G Real Estate was selected “through the bidding process of a competitive bidding” and together with CBRE acting as marketing agents.

The value of the total transactions in the Cycle & Carriage portfolio is $333 million, as per caveats filed by URA Realis on Feb 14. The four properties are the Jardine C&C’s 1200,057 sq feet of regional offices in 239 and 241 Alexandra Road ($142 million) as well as 7-storey Mercedes Benz Centre at 301 Alexandra Road ($131 million) as well as the 356,803 sq ft industrial complex located at 209 Pandan Gardens ($46 million) in Jurong and a two-storey building in Pandan Loop ($14 million) situated off the West Coast Highway.

The regional headquarters of Jardine C&C located at 239 and 241 Alexandra Road sit on sites that are zoned to be multi-user facilities with a 99 year lease beginning in 1956. In addition, the Mercedes Benz Centre has a 99-year lease that began in 1948 and an annexation of a single-user factory. The property located at Pandan Gardens is also zoned to be used as a single user factory. The facility has an agreement for a lease of 30+30 years beginning in 1978. The factory for single-users at Pandan Loop has a 30+30 year lease beginning in 1979.

“The Cycle & Carriage portfolio offers diversification and an impressive income, with an annual increase over a long lease with an excellent lease,” says van den Berg. Van den Berg adds that purchasing this portfolio in the context of M&G’s core property approach “makes sense in the long-term” particularly in the current market uncertainty.

Suburban retail mall that integrates with transportation hub
A little more than 15 years ago, prior to the signing of its agreement in 2002 with Surbana Jurong and Jardine C&C, M&G Real Estate took an 81.01% stake in the Compass Point. It was formerly Compass Point In 2002. It is located in Sengkang the mall is among the first suburban retail malls that are part of a mixed-use project that is also transportation hub.

In December of 2015, M&G Real Estate became the sole owner of the mall following the acquisition of the 18.99% stake from developer and joint venture partnership Frasers Property for $80.3 million. It invested $60 million over the course of an 11-month renovation and then it reopened it in the month of September of 2016 under the name Compass One. The new shopping center boasts an expanded net lettable area of 272,881 sq feet (from 269,546 sq feet previously) and 208 stores (up from 126 stores prior to).

“Compass One has been a good performer in the strategy (fund), both from a standpoint of income and total return,” says van den Berg. “With 100% ownership stake in Compass One, we do not have any plans to expand the amount of exposure we have to Singapore retail] more.”

Conservative attitude
In the year 2022 to January, the M&G’s primary strategy fund is investing US$1.8 billion ($2.43 billion) in total assets across Asia Pacific. It has primarily focused on five markets: Australia, Hong Kong, Japan, Singapore and South Korea.

“The lessons we can learn from the last few weeks is that there is no one market invulnerable to the effects of inflation and interest rate tensions” Van den Berg told van den Berg. Therefore, M&G Real Estate has taken a more cautious approach to managing its debt levels as well as covenant clauses.

“We started off early by refinancing loans that were already in the process and they have a typical maturity of about 4 years” He adds. “Only some loans are scheduled to mature over the next year. We’ve also added rate of interest hedging. We are now about eighty% of our portfolio of loans.”

Despite the challenges of increased rate of interest, inflation compression of cap rates as well as supply chain inefficiencies and trade the real estate market has been relatively unaffected because of the region’s rapid economic growth, claims van den Berg.

In the last two years, M&G Real Estate has expanded its reach to the logistics and residential areas within the region. It has also been selectively improving the high-quality of its office portfolio.

“As an investor with a long term view, we think that businesses are expected to stabilize throughout Asia Pacific, especially since we are experiencing a rebound in global and regional supply chain efficiencies and trade,” he adds. “As an essential part of our strategy, we invest in sectors that have an established track record and a high level of liquidity both in the up- and down market.”

Multi-family assets in Japan
Van den Berg is optimistic about the durability of the logistics industry in Asia Pacific over the long time. “Logistics are expected to gain from a steady increase in e-commerce and is aided by the growth in population and significant infrastructure and transport investments,” he asserts.

In January, M&G Real Estate Asia become a majority shareholder of 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 modern logistics facility at JPY34 billion ($329 million) and increased their stake by 25% in 2021 to% by 2021 and 58.3% today.

In the current climate of rising inflation and interest rates, M&G Real Estate has to shift its portfolio in order to provide expansion and protection from inflation. “Historically when we are in a time of healthy wage growth and a healthy inflation rate the multifamily industry tends to perform good,” claims Regina Lim director of property research Asia, M&G Real Estate. “Hence we are fond of the market of residential rentals due to its durability with low vacancy, and steady rent growth.”

The largest portfolio acquisition in the multifamily industry was the purchase of 30 residential assets located in Japan’s major cities, including Tokyo, Osaka and Nagoya from Blackstone in March 2022. The purchase price total for the portfolio comprising 1,575 units was JPY49.2 billion. The acquisition significantly increased the value of M&G Asian Property fund’s total assets in this sector to JPY109.3 billion.

The firm’s previous multifamily transactions within Japan included the purchase of a collection of residential properties situated in Chiba, Fukuoka and Osaka for US$83.7 million. It also included the purchase of two Osaka residences in May 2021 for $50 million.

“The market for residential rentals in Japan is well-established, and we’ll continue to be a part of Japan,” says Lim. “The other market that is growing is Australia’s build to rent (BTR) sector which We have invested into and will continue to invest in.”

It is a good idea to invest in a rental of built-to-rent properties in Australia
M&G Real Estate expanded its residential rental portfolio in Australia from April 20, 2022. It has committed the sum of A$450 million ($404 millions) to an arrangement together with Australian developer Novus to acquire 95% stake in the Novus Build-to-Rent Trust. The trust will build an array of multi-family properties located in important Australian cities, with a particular focus particularly on Melbourne as well as Sydney.

The trust is funded by an apartment building of 173 units located in the Melbourne’s Arts area, Novus on Sturt. The investment was done on behalf of M&G Realty Estate’s Asia Property Fund.

The built-to-rent market for residential properties within Japan and Australia are “a excellent risk-adjusted return” according to van den Berg. Van den Berg also believes in an “emergence of residential leases” in other regions.

Rate hikes for policy across Asia Pacific have been less significant than those in the US however, markets such as Australia as well as South Korea have been more robust, with rate hikes between 300 and 225 base points in the last year, according to Lim. “However the value of real estate have been able to weather this storm.”

According to Lim Lim, rate increases that are taking place in South Korea could lead to the possibility of investing in residential rentals. In the past the apartment units were built in South Korea were sold off-plan like Singapore, Hong Kong and even Australia. “But this trend is becoming dispersed, partly due to the increased prices of borrowing,” she says.

As developers from South Korea unable to pre-sell their residential properties, some might have refinancing problems. The growing inventory of unfinished and unresold stock could represent “an possibility to purchase and lease them out over the next 12-24 weeks”, Lim reckons. “This is very similar to the way in which the BTR sector began with the BTR sector in Australia.”

‘Strategic calls’
The market for residential rentals of Singapore has become “too little”, Lim laments. “Most Singaporeans and permanent residents are enticed to purchase property due to the fact that CPF funds Central Provident Fund (CPF) can be used to finance a mortgage payment and home purchase,” she adds. “CPF can’t be used to pay for rent payment. Therefore, the market for residential rentals isn’t sustainable.”

Another issue could be the Singapore government’s regulation measures to help stabilize the market for housing. “They do not want prices to increase over the course of a short period,” says Lim. “As an investor who invests for the long term we’ll be cautious when it comes to markets that have many interventions.”

The current uncertainty over the length of time that interest rates remain elevated has led to differing opinions among buyers and sellers of assets. “Even even though we have the funds to purchase and deploy assets however, we wouldn’t wish to purchase in the wrong moment; sellers who are looking to dispose of assets are cautious since they do not want to sell at a right moment,” says Lim. “This uncertainty can cause a mismatch between buyers’ and sellers prices.”

As per van den Berg, M&G Real Estate has made “several strategically-oriented calls” at the beginning of last year. “They will direct our portfolio globally to be able to withstand these difficult times,” he says.

“M&G is dedicated to the development of Asia Pacific and in the five major markets of Australia, Hong Kong, Japan, Singapore and South Korea in which we have been extremely engaged,” he adds.