David is the Chief Investment Officer and head Real Estate for J.P. Morgan Asset Management – Real Estate Asia-Pacific and leads the Asia-Pacific real estate investment platforms. Ben serves as the co-portfolio manager for Strategic Property Fund Asia. Ben is based in Singapore and is a member of the Real Estate Asia-Pacific Management Forum.
SPF Asia is consolidating its position as one of the market leaders in providing diversified core exposure across Asia Pacific with a USD 2 billion portfolio consisting of more than 70 competitively positioned, institutional quality, income producing properties with strong tenants and stable occupancy. This portfolio is diversified across nine gateway cities including Sydney, Melbourne, Brisbane, Tokyo, Osaka, Seoul, Singapore,
Shanghai and Auckland with a target gross return of 8–10 % IRR and gross annual income yield of 5–6 % per annum. The fund also has a fully integrated, industry leading ESG approach.
The case for Asia-Pacific Core Property
The Asia-Pacific (APAC) core real estate market has been growing substantially over the last decades and now makes up around 40 % of the global real estate market. Most of this is concentrated in the 8 key markets (Japan, China, Australia, South-Korea, Singapore, Hong Kong, Taiwan, and New Zealand) which make up around 90 % of the total market. These 8 markets are on par with many European and US markets
with regards to liquidity and transparency. All but China are either highly transparent or transparent as defined in the Jones Lang LaSalle Global Real Estate Transparency Index.
The region provides for stable and durable income which is supported by stable economies and the strong presence of large companies. Asia-Pacific is home to more large companies with revenues of over USD 1bn than North America and Europe combined. 40 % of Fortune 500 companies are headquartered in the region.
The region therefore is a great diversifier in a global real estate portfolio. The region provides triple diversification benefits not available elsewhere in the developed core real estate market: APAC core real estate exhibits low correlation to financial assets, other developed core real estate, and within and across APAC core real estate markets. Exposure to APAC core real estate has the potential to improve risk-adjusted returns.
Market Update
Corona appears to be better under control in the Asia-Pacific region than in other parts of the world. The average daily rate of infection is significantly lower, however some countries are facing new waves of infections. This has especially been the case in Singapore, but this was mostly in the dormitories of the foreign workers.
Therefore, the economic impact will be more limited. The worst may be over for APAC economies as conditions are expected to improve in 2H 2020.
Expectations are that all 8 countries that the fund invests in will show positive GDP-growth in the second half of this year.
On a sectoral level, trends are comparable to other regions worldwide. JP Morgan sees resilience in industrial/logistics, a mixed performance in office, and weakness in retail. Over the first half of the year, rent levels have risen in all logistics markets except for Hong Kong and Singapore. In Office, rents increased in Tokyo, Osaka, Seoul, and Brisbane, while retail rents declined across all markets in the region.
Investment Strategy
The fund defined target market allocations with primary focus on 15 cities across 8 markets. 50 % to 75 % will be invested in the most developed markets of Japan, Australia and New Zealand. The remainder will be invested in the “Asian Tigers” Singapore, Hong Kong, South Korea, and Taiwan, while China will be limited to 10 % to 15 %.
The investment strategy is defined through:
- Core Asset Characteristics
- Investing in competitively positioned, institutional quality, stabilized properties with strong tenants
- In primary markets with economic depth and institutional liquidity
- In the four primary sectors: office, industrial/ logistics, retail, multifamily
- With a disciplined approach to financing to enhance returns
- Management Team
- Use of local acquisition professionals and on-theground asset management teams
- Global best practices developed through over 50 years of open-end funds management
- Returns
- Target IRR (gross of fees) of 8–10 % / 5–6 % p.a. income return
- Rigorous Market Selection Criteria
- Combination of long-term structural characteristics and fundamentals with risk overlay
- Select sectors with a primary focus on 15 cities across 8 countries in Asia-Pacific
- Portfolio Construction
- Investment decisions driven by risk and return characteristics to achieve target return
- Investment themes driven by fundamentals, market cycle, and local, bottom-up experience
- Conservative approach to leverage –40 % portfolio max – mirroring ODCE core guidelines
Portfolio
The Strategic Property Fund Asia has a broadly diversified portfolio with a conservative leverage and low risk profile. The fund owns 74 assets (through 13 investments) with a gross asset value of almost USD 2 bn. Leverage amounts to 37 %, which is acceptable as a big part of this is linked to the very stable and defensive Japanese residential portfolio. In Japan, debt is very cheap.
The fund is close to finalizing four acquisitions in the next quarters. This will reinforce the diversification of the fund as they will increase exposure to Japanese residential assets as well as logistics properties in New Zealand, Japan and Singapore.
These acquisitions are totally in-line with the strategy of the fund to focus on the two sectors residential and logistics. These two sectors make up around two thirds of the fund, and this will remain so in the near future. One third is invested in offices. After the sale of their only retail asset, the fund has no longer any exposure to this sector. Regionally, the fund is for one third invested in each of Japan and Australia. The remaining
third is invested in China, New Zealand, South-Korea and Singapore.
Since the launch of the fund in 2016, the fund sourced 10 of 13 investments to date off market, partly through 2 strategic joint-ventures and a
further 3 joint-ventures targeted for completion in the fourth quarter of 2020.
Q&A
The first question dealt with the development of the Asia-pacific real estate markets. Core investments are a more recent phenomenon compared to the US and Europe. In the past, investors in Asia-Pacific were looking for excess returns which resulted in more value-add and opportunistic strategies. But the increasing scale, transparency, research, and institutional ownership in the regional markets, resulted in the
establishment of the core real estate market over the last 10 years. Many investors also appreciate the higher risk-adjusted returns for core compared to value-add and opportunistic investments.
The next question focused on the financing strategy. The fund targets a leverage of between 35 % and 40 %, with a higher leverage on the properties in Japan as the cost of debt is very attractive there compared to other countries across the region. The credit markets are very deep across the region which allows for a slightly higher leverage. The fund always borrows locally and never had a leverage of over 50 % on any asset. Maturities are staggered between three and five to seven years. Overall cost of debt is lower than 3 %, with the majority at a fixed rate which protects against interest rate increases. Borrowing costs have been falling lately and this might continue.
The last question was about the setup of the joint ventures, the responsibility of each JV-partner, and the reasoning behind these joint-ventures. The fund manager explained that these are only used for the residential and logistics sector. This approach makes sense as it allows the fund to get access to larger portfolios and at the same time get access to an attractive pipeline for acquisitions. The joint-venture partner typically has a strong local team that manages the properties and has a strong sourcing network. This strategy allows the fund to increase these investments
as the fund grows. If the fund would acquire these normally smaller properties one by one, it would take many years to build out a comparable diversified portfolio of high quality residential and logistics properties across the region. The fund mostly has the majority inthe JV, and if not at least a veto-right so that it effectively controls the joint-venture.
Conclusion
The Strategic Property Fund Asia fits perfectly within the strategy of our foundation. We want to increase our exposure to the residential and logistics sectors, as well as to the Asia Pacific region. This fund helps us to achieve all three of these strategies at once as they have two thirds
of their portfolio invested in the Asia Pacific residential and logistics markets.
It is the core fund in the region with the highest exposure to those sectors. In only four years, the strong portfolio management team of the fund has been able to diversify the fund across all major markets and sectors through 13 investments in over 70 properties. The fund has a strong pipeline for future acquisitions, partly thanks to the joint ventures they have setup and which are a major part of the strategy in residential and
logistics. We will continue to increase our investment in the fund as our investment foundation grows.
Frederik De Block, Portfolio Manager
On the 17th of June, we were very glad to welcome David Chen and Ben Aiken from JP Morgan to present the case for core real estate in Asia and the Strategic Property Fund Asia to our investors within our global real estate conference call series.