Faced with rapid interest rate hikes and weak markets, Mapletree Investments group CEO Hiew Yoon Khong reminds his team to ‘never assume business as usual’
Mapletree Investments group CEO Hiew Yoon Khong wonders why some of his peers in real estate, presumably content to fall back on long-term capital appreciation of their assets, believe the current market environment to be “business as usual”.
He believes it is anything but that. “It’s interesting because it’s actually very challenging. In my view, the right answer is that you need to tweak your business models to handle the future because I don’t think it’s business as usual.”
Mapletree recently saw the value of its assets under management (AUM) decline for the first time in 20 years, shrinking 1.57% y-o-y to $77.42 billion for FY2023 ended March.
If not for the strong Singapore dollar, which reduced the value of its overseas assets, AUM would have crossed $80 billion.
Within this figure, Mapletree’s owned assets shrank 14.5% y-o-y to $17.24 billion, while managed assets grew 2.92% y-o-y to $60.18 billion.
See also: Reviewing Mapletree's three REITs post-1QFY2024
The managed assets are held under the group’s three Singapore-listed REITs and eight private real estate funds.
Mapletree’s patmi fell more sharply, ending FY2023 at $1.22 billion, down 37.9% y-o-y, although revenue of $2.86 billion was largely flat for the real estate development, investment, capital and property management company.
See also: MPACT 1QFY2024 DPU falls 3.1% q-o-q from higher utility, financing costs
Hiew, who is also Mapletree’s executive director, explains that rapid interest rate hikes led to valuation pressures, which impacted the group’s patmi.
This was particularly acute in Mapletree’s commercial portfolio in the US and Europe. Those pressures have yet to let up as rates are being held higher for longer.
The macroeconomic environment across markets and sectors remains weak, Hiew tells The Edge Singapore. “Interest rates are still, as you know, quite elevated. So invariably, the interest rate impact will filter through our valuation. We have to be mindful that in our industry, we use a very significant amount of capital. Therefore, the impact of interest rates will be significant.”
As such, Mapletree has adopted “a more restrained investment posture” owing to the “extremely volatile” interest rate environment of the past 12 months, says Hiew.
With the cost of funds higher than yield in most markets, there has been a “stand-off” between buyer and seller in the real estate market, although, in recent months, more sellers have been willing to settle for less.
However, Hiew is quick to point out that this is not a situation where bargains and distress sales are aplenty. “Among the bigger real estate players, except for the Chinese, almost all of them are actually quite healthy,” says Hiew.
After two decades at Mapletree’s helm, Hiew is wary of letting trends calcify into norms. “Strategically, we have to be even more nimble than we have before. My message to my colleagues is: ‘Never assume business as usual.’ I am aware that we are always driven by habits. Look at it with a fresh pair of eyes as much as we can. Then, be bold to reimagine our business model.”
See also: Mapletree Logistics Trust holds 1QFY2024 DPU steady at 2.271 cents
Dividends to Temasek
Mapletree is one of the key property plays that form part of Temasek Holdings’ portfolio. As at March 31, Temasek wholly owns Mapletree, as well as its peers Surbana Jurong, Mandai Park Holdings and CapitaLand Group.
CapitaLand returned some $452 million in dividends to Temasek in the latest financial year, lower than some $468 million in the previous year.
In comparison, Mapletree paid out some $322.8 million in dividends to Temasek in FY2023, down from some $329 million the previous year.
“I wouldn’t describe that as a lot of dividends,” says Hiew of Mapletree’s contributions to Temasek. “As a supportive shareholder, they are aware that we are a growing entity, so they need to retain some capital for us to reinvest … The retention is actually quite high.”
With Temasek’s contributions to national coffers, does Mapletree face pressure to increase its contribution over time?
Not really, says Hiew. “Although we are quite sizeable relative to [Temasek], it’s just a small fraction of their portfolio. So, they have other ways of generating their [contribution] requirements.”
Mapletree and Temasek have “periodic conversations” about the dividend formula, adds Hiew, with the current arrangement set out some eight years ago. “So, it’s not the case of having an argument about the dividend every year … Whether there will be any review in the next two, three years, [it’s] possible, but it’s not unfair if they review it every 10 years.”
Unlike other real estate giants in Singapore like CapitaLand, City Developments, GuocoLand and UOL, Mapletree itself is not listed on the Singapore Exchange (SGX).
Instead, the group’s three listed REITs are Mapletree Logistics Trust (MLT) M44U , Mapletree Industrial Trust (MIT) ME8U , and Mapletree Pan Asia Commercial Trust (MPACT) N2IU , with MPACT formed out of a merger between Mapletree Commercial Trust and Mapletree North Asia Commercial Trust in July 2022.
Meanwhile, CapitaLand Investment was listed on the SGX in September 2021 after restructuring and now rubs shoulders with five of its REITs.
Market commentators, in their bid to find potential sources of vigour for the local market, have often shortlisted Mapletree and its port operator neighbour PSA Corp, from which it was spun off, as listing candidates.
The way Hiew sees it, Mapletree’s configuration is akin to an “incubation house” that supports its three REITs and eight private funds. “We find that this role is more effectively done not as a [listed] company because if we were to be listed, then you have all these governance issues as a standalone entity, and you are sort of restricted if you enter into any interested party transactions with the platforms within the group.”
If Mapletree were to be listed, its role would have to change “very significantly”, says Hiew. “So, the quick answer is that we never have plans to list.”
Despite this, investors are still offered multiple proxies to Mapletree’s group growth, says Michelle Ling, Mapletree’s CEO of private capital management. “The REITs show our investments in the more income-generating assets; our private funds are a mirror of what the group does as a general activity … You’re really partnering with Mapletree in our growth strategy. So, it’s not as though investors don’t have a proxy to Mapletree as a group. They have it in segregated strategy products.”
Mapletree launched two new funds during the previous financial year. In December 2022, Mapletree launched the Mapletree China Logistics Investment Private Fund (MCLIP), its inaugural open-ended fund focused on China logistics.
In February, Mapletree entered into a strategic partnership with Ivanhoe Cambridge and launched a new private fund to develop, own and operate tech sector workplaces in India with an investment capacity of over $2.5 billion. This platform focuses on both stabilised and development of high-quality Class A workplace assets in key economic hubs in India.
The riskiest parts of real estate development are still better undertaken privately and at a group level, adds Ling, who joined Mapletree in 2019 after 13 years at Goldman Sachs in Singapore.
Such risks are rife in the planning, construction and leasing stages of the business, says Hiew.
In contrast, it is much easier to acquire a portfolio of assets that is already fully leased, he notes, without having to add more value.
However, the returns from developing a new project are much more handsome, he adds. “So, the key for development is getting the chain of value-add correct; your return will be higher than just investing in a fully-leased portfolio. That’s the trade-off.”
REITs should ‘refine their portfolios’
A year before Hiew joined Mapletree in 2003, he helped launch Singapore’s first REIT — CapitaLand Mall Trust.
Much has changed since then, with REITs becoming a key asset class in most investors’ portfolios.
From Hiew’s perspective, the way REITs ought to be run should move with the times as well. “One of the key issues, which was actually very clear even back in 2002, was that if the REIT sector takes off, you’re going to reach a point where there are no more physical assets that you can ‘REIT’,” says Hiew, who was formerly CEO of CapitaLand Financial, now CapitaLand Investment. “Frankly speaking, I think we were there maybe even a few years ago.”
This is why Singapore-based REITs began to invest in overseas assets, followed by the debut of 100% overseas S-REITs, says Hiew.
Among today’s S-REITs, only Far East Hospitality Trust Q5T and Sabana Industrial REIT M1GU still hold a portfolio of 100% local assets. Frasers Centrepoint Trust (FCT) J69U , which owns nine malls and an office building in Singapore, formed a strategic partnership with Malaysia REIT manager Hektar Asset Management in May 2007.
As at March 31, FCT holds 30.97% of the units in the Malaysia-listed, retail-focused Hektar REIT.
Hiew thinks the trend will continue. “If you’re looking at IPOs, new REITs will predominantly be foreign-based.”
Looking at today’s S-REITs, many managers have to refine their portfolios “a little better”, says Hiew. “I think in chasing growth, a lot of the REITs are, frankly speaking, too big.”
Just like fund managers who struggle to keep up with ever-increasing returns as their portfolios balloon, Hiew has observed many REITs already struggling to grow their distribution per unit (DPU). “The bigger you are, the harder it is to generate growth,” he says.
Singapore’s oldest REITs, in particular, have been accumulating assets for a long time, adds Hiew. “So, you do see some obsolete assets intheir portfolio that need to be refined. Those that are investing in multiple markets may have to do a market review to see which markets they truly want to stay in and which markets they should exit.”
Hiew’s track record shows he is careful not to chase growth for its own sake. For one, Mapletree decided to pass on Ascendas-Singbridge when it was available for sale, says Hiew, with CapitaLand paying $11 billion for the merger in January 2019 — the largest local M&A thus far. “It didn’t fit our strategic focus because we are quite heavy on industrial [assets]. CapitaLand was very light on industrial; to them, doing the deal would give them the exposure but to us, [it was] more of the same.”
Elsewhere, Mapletree is “very light” on hospitality, standing in contrast to CapitaLand, which has focused on this sector as one of its core drivers.
“You don’t hear us doing that because that’s not a sector that we are looking at,” says Hiew.
That is not to say Mapletree has avoided this sector entirely. Back in February 2017, Mapletree acquired serviced apartment operator Oakwood Worldwide, before letting it go to CapitaLand’s lodging business unit The Ascott in July 2022. The purchase consideration was not disclosed in either transaction.
While logistics remained Mapletree’s largest asset class at 39% of overall AUM in FY2023, residential assets held flat at 6%. Serviced apartments and multifamily assets shrank to 1% from 2% in the previous financial year.
According to Mapletree’s latest annual report, the group wholly owns two residential properties in mainland China, a serviced apartment in Japan, seven multifamily assets in the US and two residential properties and a serviced apartment in Vietnam.
Closer to home, Mapletree owns a 61% effective stake in The Reef at King’s Dock, a joint venture with Keppel Land, now referred to as Keppel’s real estate division. Due for completion in 2025, the 429-unit residential luxury condominium at Harbourfront Avenue sold 280 out of 300 units at its launch in January 2021 and has sold 94% of its units as at March 31.
Meanwhile, Mapletree’s student housing portfolio comprises a total of 56 assets with close to 25,000 beds located across 38 cities in the UK, the US and Canada.
With owned and managed assets of $4.5 billion, the student housing business unit contributed $107.9 million to Mapletree’s FY2023 earnings before interest and tax, plus a share of operating profit or loss of associated companies and joint ventures.
Of these, 25 assets in the UK and 10 assets in the US are held by Mapletree Global Student Accommodation Private Trust (MGSA), which has a total AUM of some $1.9 billion. Launched in 2017, the fund size was around $755.7 million as at March 31.
Mapletree highlights strong demand from healthy student enrolments and “a positive shift in student sentiment” towards student housing, perceived to be more value-for-money than the private rental market amid inflationary pressures.
As at mid-May, pre-leasing for the US portfolio remained “strong” at similar levels to the same period last year, while the UK portfolio outperformed the same period last year by 12%.
With such a rosy outlook, would Mapletree reconsider listing its student accommodation portfolio? Not in the current market conditions, says Hiew. “Frankly speaking, [it is] quite likely that we are looking at the private route.”
The landscape has changed to the detriment of the bourse, and going private is an easy decision to make, adds Hiew. “Historically, if you were trying to mobilise a big chunk of capital, the obvious arena was the public market. But somewhere in the last 10 years, that landscape has changed; there’s actually quite a lot of liquidity in the private market, arguably, maybe more than the public [market].”
Liquidity in the long term, however, is a different ballgame. “One advantage of the REIT market [over] the private market is that it is liquid. By and large, in the private market, you have to lock in the investment for a significant period of time. So, there is that difference. It is not just a case of ‘A is better than B’; there are pros and cons.”
Outlook on China unchanged
Since Mapletree entered the China logistics market nearly two decades ago, the group has established itself as “one of the country’s top five logistics owner-operators”, with a footprint of close to 7 million sq m in completed logistics AUM in over 70 cities.
Mapletree’s China logistics fund, launched in December 2022, reported its initial set of results in May. The MCLIP posted 4.6% growth in fund NAV per unit for the 3.5-month period ending March 31, implying an annualised total return of over 15%. The open-ended fund will pay distributions semi-annually.
According to Mapletree, the fund saw the completion of two properties in February and April, adding over 120,000 sq m to MCLIP’s completed portfolio, which now spans 1.7 million sq m.
Mapletree expects 17 more properties to be completed by the end of its financial year in March 2024.
Leasing activity continues to be strong, says Mapletree, especially from third-party logistics and e-commerce customers, which make up around 80% of Mapletree’s tenant mix in China.
The group is acquiring land for logistics development at an estimated RMB5 billion ($930 million) per annum, maintaining a pipeline for its REITs and private funds.
Ahead of the release of national economic data on Aug 15, China’s central bank cut key policy rates for the second time in three months.
Data released by China’s National Bureau of Statistics showed industrial production in July expanded 3.7% y-o-y, down from 4.4% in June.
China is responding to market “weaknesses” to try to boost their economy, says Hiew. “If they are successful in boosting the economy, they will pick up quite fast. So, we are not that bothered about long-term, prospective changes.”
Mapletree’s management team tends to look at longer-term trends, adds Hiew. “The nature of businesses is, even if you buy completed assets, it’s not something that you can change your mind on, or decide to sell 12 months later. Generally, the sort of view taken is at least five years.”
Despite recent economic data, most long-only investors’ outlook on China has not changed, says Ling. “[The data] is just transient noise.”
‘Singapore is our homeground’
Despite all the moves Mapletree has made overseas, Singapore remains its core market and is where it wants to play. Mapletree was established in December 2000 to hold the non-port properties that were transferred from PSA Corp to Temasek.
The newly-formed Mapletree set out to revamp the World Trade Centre, which was completed in 1978. The property reopened as HarbourFront Centre in February 2003.
Earlier this month, Mapletree received provisional permission from the Urban Redevelopment Authority (URA) to redevelop HarbourFront Centre, now 45 years old.
The proposed redevelopment will introduce 101,326 sq m of offices and 42,000 sq m of retail space by gross floor area (GFA). The proposed GFA is 47% higher than the existing GFA of the 13-storey building.
The building has “quite a lot” of GFA for office use, but the quality of the space — owing to its current design — is “actually quite poor”, says Hiew. “I think there’s a lot of scope to improve that location to a higher quality of space. The full approval will take a bit more time — maybe another year or so.”
Owing to the history of Mapletree’s assets, its properties like Tanjong Pagar Distripark (TPD), St James Power Station and HarbourFront Centre are all congregated in southern Singapore.
This overlaps with the URA’s Greater Southern Waterfront master plan, comprising 30km of coastline stretching from Pasir Panjang to Marina East.
TPD is currently branded as an arts cluster, with tenants such as the Singapore Arts Museum. Hiew says they have short leases and will revert to the government.
For its original logistics purpose, however, TPD has its pros and cons, adds Hiew. “The location is very prime because it’s near the city. But having said that, it’s balanced against something unfavourable: the design is actually not suitable for modern use because it still uses lifts. Nowadays, a lot of the operators want ramps because of loading [and] unloading services.”
According to Hiew, the government is not yet ready to tender any land parcels in the Greater Southern Waterfront — “maybe some of the land parcels are still missing from the master plan” — but Mapletree stands ready. “If they were to do a tender, we will, of course, be quite interested. This is our homeground.”
Africa and the five-year plan
In his 20 years at the helm of Mapletree, Hiew has transformed the group from a Singapore-centric real estate company worth $2.3 billion to a global company with total AUM of $77.4 billion.
“When I was first asked to come here, when I assessed the company, what was very clear was that there wasn’t a well-defined mission,” recalls Hiew. “Intellectually, that was the curiosity for me: if I was able to set that business model and business objective quite clearly.”
Looking back now, Hiew thinks the group has succeeded on that front. “Since the beginning, we have basically used the same business model, focusing on the scaling, then the broadening of our sectoral focus and also across markets globally.”
As one of the longest-serving CEOs of a Temasek portfolio company, Hiew remains passionate about the job. “Frankly speaking, I’m around because I still think that there’s a lot of scope for us to scale up our business. The day when I think I can’t scale it up anymore, or [if] somebody else can do a better job, I will step down.”
FY2023 was the penultimate year in Mapletree’s third five-year plan, and Hiew says the next plan is currently in the works. “Geographically, one of the questions I had seriously put on the table is: ‘Why not Africa?’”
Hiew thinks many real estate leaders, himself included, have been “extremely closed-minded” about the continent, even as some economies sport “robust” economic growth and good governance. “This time around, we said: ‘Let’s not dismiss it. Let’s look at it. What can we do and what are our prospects?’... In our current team, none of us have experience in that market. That is a difficult thing. So, we were trying to figure something out over the next few months.”
Apart from Africa, Mapletree has also yet to enter South America and the Middle East. Hiew believes the latter is “relatively low-hanging fruit”. “We are talking to some local players about joint ventures and all that, but Africa is completely new. As a group, we have very powerful knowledge about the logistics sector that is relevant for Africa.”
Teasing the group’s next phase, which will last till the end of the decade, Hiew reiterates the importance of spotting “forward-looking possibilities” over dwelling on history. “This new five-year plan that we’re trying to put together will be quite interesting.”
