BLUEPRINT: Asia's eye-catchers

Walking through the pristinely white corporate headquarters of Ascendas-Singbridge located in Singapore’s technology hub is like taking a guided tour of its investment footprint. Each of the 29 meeting rooms in the two floors occupied by the firm at the Galaxis business complex is named after a specific city in Asia-Pacific that the developer-cum-fund manager has invested in. Enter the back office area and you are greeted by door signs bearing the name of every investment location within Singapore.

Sitting inside the ‘Singapore’ boardroom, Jonathan Yap, the firm’s chief investment officer and head of real estate funds, says the nomenclature was chosen so that people are reminded of the firm’s investment success.

Ascendas-Singbridge is one of Singapore’s main investors in industrial and business parks space with S$21.6 billion ($15.9 billion; €14.2 billion) in assets under management across the Asia-Pacific region. Close to 80 percent of this AUM now sits within the firm’s expanding funds management platform which has 11 private equity real estate funds and three listed trusts on its books.

Yet, despite boasting statistics that suggests years of tenure, the story of this Singaporean powerhouse really began in June last year.

That was when JTC Corporation-owned Ascendas, largely viewed by the industry as a business park sector-specialist whose strength lies in the listed real estate funds space, merged with Temasek-owned Singbridge to create Ascendas-Singbridge.

By September, the Singaporean firm had become one of the biggest logistics real estate owners in Australia with the A$1.013 billion acquisition of GIC’s 26-property portfolio, a deal believed to be the second-largest ever industrial property deal in Asia-Pacific. In March this year, PERE revealed Ascendas-Singbridge’s plans of launching its first pan-Asia private real estate vehicle specifically for office investments in key gateway cities.

These developments have naturally thrust the firm into the spotlight. However, ask Yap if these deals indicate a conscious attempt to aggressively expand the firm’s exposure across sectors in Asia-Pacific, and he hesitates to agree.

“I don’t think our APAC focus has changed. If we compare countries we had operating presence in before and after the merger, it hasn’t changed. We have been holding offices in China since 1995 and Korea in early 2000,” he explains. “Perhaps it was the merger that got people’s attention. And after which, because we had a series of deals, people got interested in Ascendas. In a slow market environment, it became eye-catching.”

At the same time, he does agree that the firm’s investment mandate has now broadened given the new shareholding structure.

Spreading wings

The decision to merge Temasek and JTC's four operating subsidiaries, namely Ascendas, Jurong International Holdings, Singbridge Group and Surbana International Consultants was announced in February last year. The merged Ascendas-Singbridge group is 51 percent owned by Temasek and 49 percent by JTC.

Industry observers have told PERE the merger was likely done to avoid overlapping investment strategies of Singbridge and Ascendas. For one, as a Singapore-based developer remarked, both state-owned groups were doing industrial development.

Explaining the rationale behind the merger Yap says the two group’s strategies complemented each other, and putting the two together has allowed them to “play the Asia urbanization strategy a lot better.” Singbridge is known as a Tier 1 developer, so it masterplans and develops townships, while Ascendas considers itself as a Tier 2 developer that also develops individual buildings and has fund management capabilities.

“Fund investors usually do not have an appetite for early phase development projects. With the merger, we now have a longer time horizon for investments and this allows us to use a wide variety of capital structures, including co-investment programs, segregated accounts and commingled funds. For larger developments we can use our balance sheet capital; for smaller developments we can bring in a development fund; and when the buildings are completed we can bring in a core fund,” he says.

The firm is in the midst of developing a large scale pan-Asia office investment strategy and has been acquiring office buildings with the intention of seeding the assets into a property vehicle. Yap says it is an opportune time to be broadening exposure to the office sector because of favorable attributes such as a rising middle class and growing population in many Asian economies.

While these assets are currently being acquired through the firm’s balance sheet, it is in discussions with large pools of institutional capital for potential capital partnerships.
According to earlier PERE reports on the firm’s initial plans for the pan-Asia office fund Ascendas-Singbridge was plotting to seed the assets into an open-ended vehicle called the Ascendas Asia-Pacific Core Office Fund. The firm planned to invest in major Asian cities where it has a presence, including in Korea, Singapore, India, Australia and China.

The target was to raise around S$2 billion over a period of three years for the vehicle. A first close of S$500 million was expected to be reached by June this year.

Alan Ooi, head of fundraising for real estate funds at the firm, says after receiving feedback from investors, the firm sensed a greater preference for a club deal or a joint venture format. The firm is calling it a program whereby it will seek commitments from a limited number of long-term capital partners.

Yap says a fund would need more time to raise capital and would involve a greater number of investors. There is also the need to exit the investments within the fund life, a proposition that Yap sees as restrictive in the current environment.

“Some investors we are talking to for the co-investment program have an investment horizon beyond one property cycle. Where the market is right now, there are many opportunities. But you can only fully extract value from investments beyond one cycle,” he says.

“We are in a world that is unprecedented,” he goes on to add. “We haven’t seen, collectively as an industry, a recession as deep as the global financial crisis followed by that much liquidity created through quantitative easing programs. Our proposition is that in a world that is uncharted one needs to understand what the profile of the capital is and why it doesn’t want to be locked in a fund. Having said that, fund structures do make sense for some investors.”

Betting on India

The firm is no stranger to taking the less trodden path. When it decided about three years ago to acquire the land to build the Galaxis building, now the company headquarters, not many people were interested in bidding for the space. Today, the completed asset is 100 percent leased and is said to be generating a high single digit yield on cost.

“I believe the market has evolved to a point where it is no longer a macro play but a micro play,” says Yap. “That is where ground understanding and presence comes into play. We will not invest unless we already have or intend to build a strong ground team. We believe our value-add is through real estate value-add and not purely relying on picking a cycle.”

A case in point is Ascendas-Singbridge’s adventures in India. The firm is one of the few foreign investment houses that stayed put in the country after the global financial crisis. Yap admits that India has been a challenging market, but the firm believes there are more pros than cons to investing there. A growing, educated population, relatively untapped consumption power, and dominance in the IT and software sector are a few of the draws he mentions.

In a November 2013 interview with the Press Trust of India, the country’s official news agency, Manohar Khiatani, deputy group chief executive officer of Ascendas-Singbridge said: “For us, India remains an interesting market with strong growth potential. It has a competitive, qualified labour force and global companies will continue to choose India to conduct their business, which has contributed to the success of our completed parks in India.”

The first private equity real estate fund to have been launched by Ascendas was in fact India-focused. In 2005, when the firm started its private funds management business, it set up the Ascendas India Private Parks Trust. The fund corpus was invested in brownfield development projects in the IT parks sector. Two years later, the fund was listed, becoming the first Indian property trust in Asia. As of March this year, the trust owned six IT parks in the country valued at S$1.1 billion.

Yap says that the firm has navigated through multiple property and economic cycles over the years and made money from its investments in India.

“When the trust was launched in 2007, the rupee was around 27 to the Singaporean dollar. We have gone through cycles, the currency has gone through a correction, and as a result we have had a single digit growth in Singapore dollar terms. But in terms of rupee growth, the NPI has grown 12 percent to 13 percent on a compounded annual basis since 2007. At the end of the day, it is all about the investment objectives of the investing vehicle. You have to make adjustments and react to short term situations, but you cannot lose sight of long term objectives.”

India currently takes up 11 percent of Ascendas-Singbridge’s total AUM. In 2013, the Singaporean state fund GIC Private became a principal investor in the Ascendas India Growth Program which attracted S$300 million of equity to invest in business space in Bangalore, Chennai, Delhi, Hyderabad, Mumbai and Pune. The firm is now in the midst of closing a new India private equity real estate fund for investments in IT parks and offices. Changes are also underway on the management front. Sanjay Dutt, former managing director of Cushman & Wakefield in India, has been appointed as chief executive officer for Ascendas-Singbridge’s India operations.

One Singapore-based logistics fund manager, a competitor of Ascendas-Singbridge, says the firm’s active presence in India makes it an ideal contender for entering the logistics sector, a sector that hasn’t yet been embraced by international warehouse operators.

Yap says the firm has been spending time looking at the logistics sector, but wouldn’t say if an investment is on the cards anytime soon. For one, the lack of a nationwide Goods and Services Tax (GST) means each state operates its own taxation regime, a thorn for any logistics deal in the country.

“There is always a right timing for the right strategy,” he says. “There are logistics assets in India, but they aren’t that organized and not investment grade according to international standards. What you are effectively buying is a land bank, and to use the land for other purposes or for redevelopment.”

While a more business-friendly government at the centre has indeed helped foreign firms such as Ascendas, Yap says it is unrealistic to assume reforms to happen overnight. He remarks that over time one becomes immune to governments coming and going.

Yap has also spent a few years living in India. He says when he first moved to the country in 2004, everyone was rejoicing about the imminent REIT regulations that were supposed to be passed in 18 months. It is 2016 now, and REIT rules are yet to be set in stone.

Enter with caution

While Ascendas-Singbridge is an old hand at investing in India it entered guns blazing into Australia with the acquisition of GIC’s portfolio last year via the Ascendas Real Estate Investment Trust (A-REIT). Then in April this year, it made its first office buy in the country, acquiring Innovation Place, a 20-story office tower spread over 294,877 square feet, in Sydney. The firm now has an estimated $2 billion in assets under management in Australia.

According to the Australian press Ascendas’ GIC portfolio buy reflected a yield of 6.4 percent, which was felt by many industry observers at the time to be an overpriced deal. Incidentally, all final shortlisted bidders, including Redwood, Warburg Pincus, and Ascendas-Singbridge, were foreign buyers who could take on more debt and were willing to pay a premium for a portfolio of this scale, one of the bidders told PERE at the time. As per a report in the Australian Financial Review, Ascendas-Singbridge was able to secure $600 million in debt for the portfolio.

Yap does not agree that the fund paid a premium. He says given the high WALE, leasing and rental figures, it is a resilient portfolio that was bought at a fair price. “In some years’ time, some of the assets could even have alternate uses beyond logistics that can improve the return profile further. All assets are also freehold, so it gives us the opportunity to have that additional dimension,” he says.

More importantly, it is the capital structure used to acquire the portfolio that justifies the price, he explains.

“There is a difference between a REIT, where the investors are holders of public equity versus the investors in a private equity real estate fund in which case they need to make money by selling the asset. For REIT investors, they are looking for a steady income right now. So the cost of capital is different between the two.”

Ascendas-Singbridge also prides itself on having a high sponsor stake in each fund for better alignment of interest with its limited partners in comparison to other general partners. For instance, it has now increased its stake in the A-REIT to 20 percent, a sign that the firm “puts its money where its mouth is,” says Yap.

China is the other market where the firm has been investing for many years. In April last year, it raised and deployed S$333 million via the Ascendas China Business Parks Fund 4 in industrial and business park assets. The development portfolio in the Suzhou Industrial Park, one of the firm’s flagship projects in China, was presented as a seed asset in the vehicle.

However economic distress in China, which reached a peak last year with a summer stock market rout, has prompted many international investors to slow down their pace of investments in the country. Ascendas too has not made any new investment after the April fund launch though the A-REIT recently divested its investment in the Jiashan Logistics Centre to the Goodman Group. Additionally, the trust also sold the Ascendas Z-link, a business park located in Beijing, reportedly for around S$160 million.

A recent research note by the Singapore-headquartered DBS Group on the performance of A-REITs noted that the two divestments would “enable it to realize value for its investments in China, enabling the REIT to channel the proceeds to other sources.” However, it also further added that “while China remains a market that management remains keen on investing, the lack of sizeable investments will mean that the REIT is likely to struggle with efficiencies.”

Ascendas-Singbridge is also understood to have been contemplating the launch of a new China-focused private equity real estate fund that would be invested in properties with a value-add potential, but Yap says the firm is only in the pre-testing stage and the fund would only be launched in the later part of this year or next.

And, while he acknowledges the cautionary stance being adopted by investors, he says a 6 percent GDP growth rate for a country undergoing a period of transition is still remarkable.

“When the market is hot you won’t buy anything and everything. You need to make investments that have a solid foundation,” he explains. “We need to have a price entry that makes sense. Maybe there are some vendors that are still expecting prices that don’t make sense to us.”

Drawing on his firm’s experience in India, he goes on to add: “In India, for instance, we made some investments even when the market was slow and the currency was bad. That didn’t stop us from making investments. At the end of the day, these macro considerations do affect the pace but you don’t lose sight of the fundamental investment principle.”

Over the years, the firm has consciously built a specialized investment approach for each market whether it is through country-focused funds or through the choice of sectors. Yap says this would help to avoid any confusion and investment overlap as it develops a pan-Asia office strategy that is also targeting the same markets.

A key property market conspicuously absent in its priority list is Japan. Yap says it is not just macroeconomic headwinds that have acted as a deterrent for investing there. “What is more important is the differentiation that we can bring to a market,” he says. “We don’t have operations on the ground in Japan currently except a small team looking after our two hospitality investments.”

The same line of reasoning exists for why the firm has not yet forayed into gateway markets beyond Asia. ‘Just buying one building and holding on to it does not make sense and that may not be enough reason to enter a market,” he says.

While Ascendas’ peers in the industry complement its methodical approach to investing, many do not count it as a firm that should be considered as one of them. The often-repeated comment is that the state-backed group does not face the same challenges as other fund managers which are raising institutional capital for Asia currently. And now, with the corporate merger, the challenge from non-state backed entities has almost been eliminated.

Yap counters this criticism. “We still have to compete for capital like everyone else,” he says. “The only thing is that because of parentage we are in a position to get better lending rates. Investors are also assured of our ability to take positions. And they know we won’t compromise on corporate governance because the consequences of that will be way too much.”

Given that around 80 percent of the firm's S$21.6 billion of AUM sits within its fund management business, institutional investors appear happy with the benefits of life under the Ascendas-Singbridge's umbrella. That, they believe, will help them weather the storms today's market can throw at them.