Back to work does not necessarily mean back to the office although diminishing Covid infections have allowed a rapid economic reopening in the US. “As we watch the economy accelerate, we can clearly see that populations in both the US and globally are returning to recreational activities far faster than they are returning to their offices,” notes Citigroup’s Global Wealth Investments Strategy Bulletin.
“After 15–18 months of working from home, the idea that everyone is returning to the office full-time and that business travel will lastingly return to the level it did before is unlikely,” the bulletin says, adding that workers appear to prefer working from home.
The Citi report cites data that expected earnings of the S&P 500 index components is likely to rise by 54% in 1HFY2021. A record high number of firms are expecting record earnings, Citi says, an indication that workfrom-home (WFH) has actually been positive for productivity.
In Asia, CBRE finds that Grade A net office absorption in 2020 totalled just 31 million sq ft in gross floor area (GFA), the lowest annual total in more than a decade. This was due to a halt in leasing activity following the onset of the pandemic combined with a phase of evaluation to consider the impact of remote working, CBRE says.
“We are less inclined to believe that the post-Covid economy will resemble the pre-Covid economy in every respect. Knowledge learned and efficiencies gained during the pandemic shutdown should have lasting (if discrete) benefits. Remote work and a higher level of digital commerce are among them,” Citi notes.
Against this background, property fund managers have pivoted to other asset classes. In a May report, PGIM says, “Logistics remains an overweight in the near term to capture value growth on the back of ongoing occupier demand despite risks of a supply response further out. A lot of capital is targeting the sector, so specialist entry points are needed to make it work — either via a development play with a long lease in place or by targeting a specialist sub-sector with an operational angle for additional value creation, notably in cold storage.”
Opportunities in cold storage logistics
Benett Theseira, head of Asia Pacific, PGIM Real Estate, sees cold storage as increasing in popularity for funds because of Covid and economic trends. “Cold storage is a sub-sector of logistics property. It is partly driven by the dynamics of consumption growth, food, and increasing concern in food security,” he says in a recent interview. “Food resilience has been highlighted by the pandemic. Nonfood related items have also increased demand for cold storage.”
PGIM acquired a cold storage facility in Buroh Lane in 2017 for $194 million, translating into $301 psf of gross floor area. The property has a GFA of 645,538 sq ft. As a comparison, Cushman and Wakefield points out that in 2019, a food factory with cold storage was acquired for $32 million or $325 psf. The cold storage property is part of PGIM’s value-add fund.
“We took it on while it was under development, hence taking on development risk, and lease-up exposure,” Theseira says. Based on PGIM’s entry cost and on a stabilised basis, Theseira says: “We are in the money on this.”
PGIM is also investing in cold storage facilities in Korea and Japan. “In Korea, a lot of logistics assets are trading at 4.5% yield and we secured this asset at slightly over 5% yield and there’s growth in that sector and drivers for food security are pretty strong,” Theseira explains.
Cold storage is a new asset class and it takes time for investors to gravitate to new asset classes, according to him. “Yields for logistics assets have compressed quite a lot because of resilience during the pandemic as well as sharp growth in demand for logistics assets. For cold storage we don’t feel the yield is any more compressed,” Theseira reckons although there are fewer facilities and they are harder to access.
Cold storage facilities may add to operational risk because infrastructure such as freezers, refrigeration and additional power are required. CBRE points out that these cooling systems, insulation and air-proof doors all translate to higher capex costs, estimated at 40%-60% than a normal warehouse. Operating expenses of cold storage facilities are also typically greater due to higher power usage, with refrigeration accounting for more than 70% of overall electricity consumption.
“Cold storage requires the operation and maintenance of sophisticated equipment. The complexities of cold-storage warehousing means that this operational experience primarily sits with end-users, or specialised cold storage companies. It is therefore critical for investors to either secure a high quality operator to ensure the smooth operation of their cold storage facilities, or have long-term tenants to fit out the space to suit their needs, which helps to increase asset values,” CBRE says.
“As an investor, we look at passing cost and risk on to tenants so we work with good partners who can manage facilities,” Theseira says. PGIM’s cold storage facilities are in private funds. The listed market in Singapore has very few cold storage plays.
Among the S-REITs, ARA LOGOS Logistics Trust owns ALOG Cold Centre with 344,681 sq ft. It contributed $10 million or 8.5% to total rental revenue of $117.4 million in FY2020 ended Dec 31, 2020. In January this year, ALOG acquired two cold storage facilities as part of its $404 million acquisition of logistics properties in Australia which will be completed at end-January. Of these the Brisbane property is still under development and will be leased to Teys Australia while a property in Victoria is leased to Lineage Logistics.
Elsewhere, Mapletree Logistics Trust owns four cold storage facilities, one each in Hong Kong and China, and two in Korea. ESR-REIT owns 6 Chin Bee Avenue with 324,166 sq ft which is master leased to a food company for cold storage. Other local cold storage plays are Singapore Airlines and SATS.
Consumption play
According to Theseira, PGIM’s logistics portfolio in Singapore is in excess of $2 billion. “We are positive on logistics, and so is everyone else. It’s driven by ecommerce and consumption. Some of the consumption driven factors are things in play pre-pandemic. For Asia it’s demographics with improving living standards for the middle class,” he elaborates.
In April this year, PGIM partnered with Manulife, a Canadian insurer, to acquire a 90% stake in an Australian logistics portfolio from Blackstone for A$850 million ($857.3 million).
Although ecommerce has had a negative impact on physical retail, PGIM continues to hold on to one retail mall in Singapore, NEX. PGIM bid for the land in 2007, and took development risk on the mall, which is why it was not in the PGIM Asia Retail Fund which at the time was a core asset focus.
“NEX benefits from being on two MRT lines, a bus interchange, and is situated in a strong catchment for HDB and landed housing,” Theseira indicates. He acknowledges that the mall was impacted during last year’s “circuit breaker” lockdown, but prior to the most recent Phase Two closure, “the mall was as good as pre-Covid levels.”
Theseira also acknowledges that managing a mall is no easy task. A mall requires constant planning, with attention to tenants that find trading conditions tough. “From an investment perspective, we continue to believe in the strength of the asset and it’s one of the best large regional malls in Singapore. We are a long term holder of the asset, and we believe we can work through with our tenants in terms of mitigating the impact of ecommerce,” Theseira says.
Exit strategy
PGIM’s portfolio of five retail malls and an office tower in its Asia Retail Fund (ARF) was divested to Frasers Centrepoint Trust (FCT) and Frasers Property (FPL) in 2019 and 2020. PGIM declines to reveal the sale value. However, FPL and FCT acquired the portfolio for around $3 billion in 2019. Last year (2020) FCT acquired the stake in PGIM ARF it did not own from FPL.
Liang Court was separately sold for $400 million to CapitaLand and City Developments. The two developers, along with CDL Hospitality Trusts and Ascott Residence Trust are redeveloping the entire asset with the new integrated development comprising a hotel, a serviced residence, two residential towers and a mall.
“We worked on a strategy to unlock value. PGIM ARF owned Liang Court. The mall was tired. We looked at the whole property and it was clear to us that a redevelopment would yield the highest value. We were in discussion with other co-owners on a redevelopment plan and eventually we agreed to sell our portion of the asset to them. It was a great unlocking of value and we achieved a significantly higher price,” Theseira recounts.
“As the retail sector got challenged our investors believed it was time to exit retail and we then looked at how we could achieve the highest value for investors,” he continues. Different ways to divest the assets were considered. Ultimately, when FPL expressed an interest, it acquired the malls with the operating team and AsiaMalls management. “Eventually as Covid came, we struck a deal for a final exit which was great for our investors,” Theseira says. He adds though, that neighbourhood malls like those in the fund are resilient and has been a great platform for expansion for FPL and FCT.
Office still in play
In April, PGIM acquired 108 Robinson Road for $143 million and Lucid Square Toyocho in Tokyo for US$120 million ($161.7 million). “We are looking at office opportunities for our core and core plus funds, which own offices in Australia, Japan and Seoul,” Theseira says. As he sees it, most investors view Singapore as stable and safe. “Hence you find more businesses and investments moving to Singapore.”
What supports the Singapore economy will also support demand for office, Theseira reasons. Singapore has seen an influx of tech companies and start-ups with the city-state being used as a regional and sometimes global centre for technology companies. Singapore is also a gateway to Asia.
“Even as some companies give up space, for example financial services, the space has been taken up by tech companies,” Theseira points out. In addition, there has been a growth in family offices and wealth management companies setting up in Singapore. “We are more selective and more focused on location and looking at what assets and locations will be winners,” Theseira says.
The office on Robinson Road acquired by PGIM is freehold, and the property is in its value-add fund. “Our plan is to do some improvement. Our investment thesis is to strata sell, and there is a lot of interest from individual investors and family offices to own this space.”
