Benett Theseira, Managing Director, PGIM Real Estate and head of Asia Pacific, says his private equity property funds are focused on the three Ds – digitalisation, decarbonisation and demographics.
Assets on the digitalisation front that fit into this theme are logistics assets, and data centres. “Digitalisation has two main components. One is online activity in all ways, social, business and ecommerce. We felt ecommerce would drive demand for logistics assets and we invested a lot in logistics in the last 2 years. We’ve increased our weightage in Asia, US and Europe,” Theseira says.
Despite the issues experienced by the data centre S-REITs, Theseira remains positive on data centres. He continues to believe that data centre usage is likely to grow. In addition, to ecommerce, the rise of influencers being used increasingly by corporates for marketing purposes coupled with AI and the metaverse all increase cloud usage.
“Because of concerns of carbon footprint we think supply of new data centres will be impacted and the stock cannot grow exponentially. So the current stock will become more valuable,” Theseira reasons.
“Our data centre strategy is to invest in data centres globally, and we have good client interest to co-invest with us. We’ve focused on hyperscale data centres which are the most efficient in terms of energy use,” Theseira says.
To lower its data centre carbon footprint, PGIM is looking at tapping on renewables to partly power the data centres. “Most data centre operators have made net zero carbon commitments. We look at this very closely when selecting our operating partners,” he adds.
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Is data centre play still on?
Is PGIM late on data centre play? Jim Chanos famously warned that funds such as PGIM’s who hold data centres may be at the losing end of the value chain. Analysts at Morgan Stanley summarised the concerns as a cloudy outlook for demand and pricing, low returns on capital, rising competition, cost inflation, higher finance costs and the risk of “obsolescence”.
Amazon.com, Alphabet, Google and Microsoft Corp are the industry’s biggest customers, but they’re building their own facilities too making them competitors for the likes of PGIM’s private funds. Won’t the cloud providers cannibalise future growth at the expense of PGIM? Moreover, PGIM’s fee structure may lead to even higher costs for its investors (in addition to rising funding costs).
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In fact, Intel reported that in 4Q2022, data centre and AI sales fell by 33% due to "competitive pressure," and a slowdown in demand from enterprise customers and businesses in China.
“Amazon and Alphabet will own some and lease some. They may own more initially but most of the players we talk to have a mix of both. Sometimes it’s speed to market, if someone else builds it. Building a data centre is capital intensive and it’s a drag in their capital to own their data centres,” Theseira says.
Senior living and co-living
On the demographics front, Theseira believes senior living ‘is a good space’. “In the US we are big investor in senior living. It’s like a country club. If you go into these communities, you get a home or apartment. There are activities with people of similar demographics. They remain active. And we’ve seen models where residents curate activities for other residents, eg retired scientists or university professors run classes,” Theseira says.
PGIM has invested in some aged care facilities in Australia as well. “We have lent to some portfolios to get exposure. And we’re looking at an equity option,” he adds
At the other end of the residential spectrum is rental options for young executives and young couples. PGIM entered the co-living sector during the pandemic. It acquired two hotels in Hong Kong through a distressed sale and is transforming the hotels into co-living space. “One is in Central, and the other Kowloon, close to the MTR. We bought distressed hotels and converted them to co-living. We are looking at such opportunities in Singapore to build or convert properties for co-living ,” Theseira says.
Leases are typically 2-3 years. In general, 60% to 70% of the tenants stay for a year and longer. Around 10%-20% stay for a month or so.
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In Asia, rental housing hasn’t caught on although it is well established in UK, Europe and Japan with around 50% of the population renting. In the US, multi-family living forms around half of the residential sector.
Decarbonisation cuts across all real estate asset classes including digitalisation and demographics. End-users, investors and regulators are increasingly focusing on green buildings. “We feel that there'll be increasingly a price distinction or value distinction between assets that are considered good assets or not. Some properties are undervalued because they don't have all the metrics that make them good. But there are opportunities to upgrade them. We bought 118 Robinson Road, we’ve done upgrades and it’s now LEED Platinum. The fact that this building will have the highest standards in terms of sustainability,” Theseira says.
“Our focus is to be overweight on secular drivers that provide outsize growth,” Theseira says. His strategy is to get the upside from development and growth. At current interest rates, the spread between cost of funds plus fees, and property yields is pretty tight. Growth provides the upside. “Ultimately where yields are tight, where you get your outsize returns is from growth,” Theseira confirms.
He points out that returns from his value-add funds are in the mid-teens, and around 7% to 9% if the fund is a core fund.
