The presentation was followed by a discussion across ULI members who shared their thoughts on the report findings. Moderated by David Lee, Partner, Real Estate & Hospitality Assurance, PwC Singapore, the panel comprised:

• Jun Sochi, Chief Operating Officer, Cushman & Wakefield Asia Pacific
• Jeanette Tay, Director, EQT Exeter
• Emilia Teo, Managing Director, TE Capital Partners
• Wong Ping, Chief Investment Officer, Frasers Property Capital

Where will the capital go?

An audience poll kicked off the panel discussion, where audiences were asked in which direction capital allocation for 2023 would go. The audience found consent in silence when the Moderator, David Lee, concluded that the audiences expect capital allocation to fall in 2023.

Safe haven assets

Against a pessimistic backdrop for real estate investments, the moderator highlighted different defensive asset classes cited in the report such as “bed space” assets, logistics and data centres, and initiated his first question to the panelists seeking their thoughts on where the best opportunities will be.

Wong Ping of Frasers Property Capital affirmed the focus on logistics and multifamily assets and believes that asset operators with a hospitality background will be well placed to provide services to the multifamily asset class as a natural pivot.

Jeannette Tay of EQT Exeter shared her optimism in the hospitality sector, saying “we see opportunities in the hospitality space and believe that the recovery from covid and the pent-up demand for corporate travels are big underpinnings for a strong investment case on hospitality assets where operational cost increase may be more likely to be passed on to consumers at this time.”

However, Tay warned that the recovery in the hospitality sector may not be uniform across countries.

“The recovery for hospitality is not similar across the board. Countries such as Japan, Australia, and Singapore fare better due to strong domestic demand and perhaps from the countries’ positioning as an attractive place for visitors.”

The appeal for mainstream income-generating assets such as Office and Retail

“What about the fate of mainstream income-generating assets such as Office and Retail?” Mr Lee asked.

Jun Sochi, whose firm, Cushman & Wakefield, operates in the services sector in real estate and works with developers, investors, and tenants alike, shared his thoughts that retail assets are indeed facing a cooling off and that office assets are experiencing a flight-to-quality situation from occupiers not just in Asia but everywhere else, including Singapore.

Does tenant demand compensate for development risks?

In the current environment of high inflation and high interest rate, a key question on developers’ minds was whether development risks are still worth taking and if tenant demand would result in a premium that could compensate for those risks. Mr Lee also asked what differentiating factors would justify taking those risks.

Emilia Teo, whose firm, TE Capital, is well-known for developments not only in Singapore but also for operations in Australia and multifamily investments in Japan, shared that even though rapid inflation has increased development costs, such costs could be mitigated by providing high-quality buildings.

“Office buildings with high ESG ratings and are sustainable, are green, and are committed to providing meaningful amenities and wellness should be well-positioned to attract people back to the office. These considerations may just be the differentiating factor.”

Sochi agreed, explaining that tenant requirements on the building they occupy have changed over time.

“Tenants do have their ESG targets, and in the past it was simply what grade a building was but now, selection criteria include not only the grade but also the greenness and wellness that the building would provide. It is also about what we should do to bring people back to the office while balancing hybrid work arrangements. We certainly see a shift to building with high qualities.”

Now that ESG consideration is widespread, Lee posed an interesting question about product differentiation, asking if real estate players focusing on the same issues and possibly coming up with similar solutions, may erode one’s competitive advantage.

Wong was quick to disagree, explaining that competitive advantage is not easy to achieve and can be had only with the availability and sufficiency of data upon which measurements and differentiating factors could be built.

“You need to do a little more than just claim ESG characteristics in your assets. You need data to provide a baseline. It is also about how much data you track.” said Wong. All panelists unanimously agreed, with Sochi explaining that data is “critical and foundational to measuring ESG impact and creating solutions.”

Will the average global temperature rise stay below 1.5 degrees Celsius? Which are the areas in real estate to be improved on to achieve a net zero?

As the talk on ESG intensified, Lee timely polled the audience for their thoughts on how likely the average global temperature rise could be reined in at below 1.5 degree Celsius. Almost everyone in the audience doubted it which prompted Mr Lee’s disappointment swiftly followed by laughter in the room.

“This begs the question of what actions could be done on top of what’s already done to help achieve the target,” said Lee.

Sochi believes that committing to a roadmap towards net zero would be a good start and that institutions, investment funds and owners have the power to push towards the objective. However, the challenge for property owners lies first in measuring and reading the data from existing stocks. On a positive note, he also highlighted the prevalence of companies that are already providing services to collect and track ESG data for real estate.

All panelists believe that achieving the net zero target is possible but noted the practical difficulty in the journey towards the target.

Teo said that the net zero agenda is on her firm’s radar and she hopes to progressively move towards that target. She also added that for their latest office development project, green features include the use of solar panels, low-emissivity glass and energy-efficient chiller systems. Additionally, the firm will be implementing technology for live monitoring and green reporting of energy consumption, and water consumption which would help tenants track sustainability performance.

Tay, who operates in the Value-Add space, suggested consultation with “green consultants” to help chart an ESG roadmap but noted that obstacles include requiring large investments to replace old physical infrastructure and this may be difficult to do.

“ESG considerations would require deep pocket owners because, for example, replacing a 20-year-old air-conditioning system in a building would not come cheap.”

Considering net zero when underwriting for an asset

“How then, would net zero considerations affect underwritings?” asked Lee.

Wong said that influencing stakeholders is key. She pointed out that markets that are high on ESG standards are those that have done well in educating the stakeholders. She believes that developers certainly have the power to influence stakeholders and cited actions such as taking green finance and making green leases as initiatives.

Sochi added that “ESG considerations do not make or break investment case. Instead, these considerations are weighed in the risk spectrum.”

Tenant expectations on green buildings

Lee went on to probe tenant expectations and bargaining power as well as tenant demand towards green buildings.

In reply, Wong referred to Sochi’s earlier comment on tenant’s flight-to-quality behaviour and added that tenant demand varies according to the company’s own ESG goals and objectives.

Teo also referenced her experience in Australia, where institutional and government tenants have internal guidelines on green requirements of office buildings that they lease and there is a trend of such tenants building in conditions in their leases allowing them to impose penalties or even vacate the space if such green requirements are not met.

Audience question: Barriers to restricting more multifamily assets

After some heavy discussions on ESG, it was time to take questions from the audience and one question was about the barriers to a hot asset class such as multifamily.

Sochi started by referencing a survey from investors across the Asia Pacific that suggested that 75% of the respondents believe that multifamily will be a significant asset class in Asia in the next 10 years. He suggested that fundamentals such as demographics, urbanization, and a generally well-educated population in a service industry needing a house yet hampered by affordability present strong demand drivers for the asset.

Tay shared her observation that Singapore’s high land cost is a significant barrier that hinders the proliferation of multifamily assets. She believes that multifamily assets can be supported through meaningful intervention and cited an interesting example of leasing out land with the purpose for operators to build residential housing for specified workers such as those in healthcare.

“If there is support from a regulatory basis, multifamily assets in Singapore could work,” said Tay.

Teo highlighted that key drivers for multifamily assets include affordability, government regulations and culture. Believing that Singapore is unique, she said that its government has done a remarkable job in public housing, ensuring the affordability of homes for Singaporeans which in turn encourages a culture of home ownership as opposed to a ‘renting culture’ in other countries such as Japan.

Agreeing with the panelists, Wong said that “it is an affordability thing. Japan is a very deep market. Governments have done so in China and Australia, and I would like to see it in South Korea.”

Regional capital flow: Developed markets or developing markets?

The top 5 in the city investment prospects continue to be in developed markets (Singapore, Tokyo, Sydney, Osaka, Seoul) whilst “mid-tier” comprises many Southeast Asia (SEA) developing markets cities.

Mr Lee asked if there are advantages the panelists see in the developed markets versus the developing markets.

Tay, who covers Southeast Asia markets, commented that Southeast Asia is a challenging market due to fragmentation. However, she believes that Vietnam, particularly in the logistics sector is “ahead of its time” and has done very well, perhaps outdoing the Philippines and Indonesia. She explained that rents in other high economic growth countries such as Indonesia have not kept up to where they should be.

Teo believes in the potential of developing markets but cited access and transparency as a barrier to putting a foot in these markets.

“Even though some developing markets are high growth which attracts people with opportunities, access to these markets and opportunities remains a challenge given the opaque nature of these markets and success in developing markets depends heavily on relationships and local operators,” said Teo.

The convivial discussion wrapped up the launch of the Emerging Trends in Real Estate® Asia Pacific 2023 report, followed by an evening of networking hosted by PwC Singapore, our longstanding partner behind the Emerging Trends in Real Estate^® series and a proud Patron sponsor of ULI Singapore.

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