Simon Treacy’s contrarian bet on China

For private real estate veteran Simon Treacy and Singaporean landlord CapitaLand, the covid-19 pandemic offered a fresh start.

Having previously served as global chief investment officer at BlackRock Real Estate and global chief executive at MGPA, the Singaporean real estate firm bought by BlackRock in 2013, Treacy returned to the industry in October 2021 after two years in semi-retirement in Hawaii. His mission: to launch CapitaLand’s private equity real estate business.

Treacy came aboard just as the Singaporean group was restructuring to form two separate entities: CapitaLand Investment, its listed investment management platform that includes the private equity real estate business, and CapitaLand Development, its private development business.

Speaking with PERE at the firm’s Capital Tower in Singapore in late February, Treacy says the pandemic was an optimal time for an investment reset: “Covid presented a chance to take a fresh look at the changing markets and investors’ needs.”

CapitaLand Investment

Established: 2021

Real estate assets under management: S$132bn

Funds under management: S$88bn

Lines of business: Listed fund management, private fund management, lodging management, real estate investment

Group chief executive officer: Lee Chee Koon

Chief executives for private fund management:
Chief executive officer, private equity real estate, real assets: Simon Treacy
Chief executive officer, private equity alternative assets, real assets: Patrick Boocock

Number of investment and asset management professionals: 260

Platform launches

One of the markets at which CLI has taken a closer look is China, where Treacy has been tasked with growing CLI’s fund management business. The day before Treacy’s interview with PERE, CLI announced two significant developments for its China real estate business: the establishment of a S$1.1 billion ($825 million; €764 million) CapitaLand China Opportunistic Partners Programme to invest in special situations in the country, and the launch of a S$1 billion data center fund, CapitaLand China Data Centre Partners.

The firm’s big push into the Chinese real estate market comes as many Western investors are shying away from the country, at least in part because of geopolitical issues. Stephen Tross, chief investment officer of international investments at manager Bouwinvest Real Estate Investors, expressed his concerns over investing in the country during a panel at the PERE Asia summit conference, held days prior to Treacy’s interview.

“For those interested [in China], they don’t need to engage in many rounds of bidding”

Simon Treacy, CapitaLand Investment

As Tross told delegates at the four-day event, the Dutch investor changed its views on investing in China because of the country’s failure to condemn the Russian invasion of Ukraine, as well as its increasingly hardline stance on Taiwan. This led to Bouwinvest selling its listed exposure and ceasing to make new unlisted investments in China. He regarded the uncertainties over both Ukraine and Taiwan as “risks you won’t get compensated for.”

Treacy is well aware of the contrarian nature of his firm’s approach to China, but believes there has always been “a portion of the market that will hold a contrarian view.” Moreover, he sees attractive opportunities in the country when there is less competition. “For those who are interested, they don’t need to engage in many rounds of bidding. They can also have more time to do due diligence and buy something that they are fundamentally comfortable with,” he says.

The return of government support

Bolstering CLI’s investment push in China is the return of government support for Chinese real estate, after efforts to deleverage the country’s developers in recent years led to a slump in the sector.

“I think the government in the last three or four months has been trying to kickstart the real estate industry in China again, including C-REITs,” says Treacy.

One of the most recent initiatives was the launch of a pilot program by the China Securities Regulatory Commission to allow private equity investment funds to invest in residential and commercial real estate and infrastructure projects. The policy also encourages participation from foreign investors.

“All these policy changes are to provide more than sufficient liquidity into the real estate market in China. In terms of sector, it is very self-explanatory that the central government wanted to bring capital into the new economy and new infrastructure,” explains JLL’s Pang.

A huge domestic market

One capital source CLI is targeting for its China real estate strategy is the country’s domestic investors, which are growing their allocations to real estate. Renminbi funds are a big focus for CLI, Treacy notes. Since the firm got its RMB license in July 2021, it has launched three onshore RMB real estate funds, raising close to 4 billion yuan ($581 million; €538 million) in third-party capital and bringing 10 new Chinese investors into the firm. “The domestic market itself is huge. That’s also because Chinese institutions cannot invest in real estate overseas unless they already have capital overseas,” adds Treacy.

David Green Morgan, global head of real assets research at MSCI, says: “Domestic investors have always been the dominant source of capital in China, and despite the opening up of the country towards the end of 2022, that is unlikely to change.”

Over the past five years, foreign capital represented 24-42 percent of the total real estate transaction volume in China, according to MSCI.

Treacy expects domestic investors’ allocations to real estate will only grow as China’s savings market develops and the country’s insurance companies continue to expand. As of December 2021, 5.8 percent of the assets managed by Chinese insurance companies, estimated at 24 trillion yuan, are invested in real estate, according to the China Banking and Insurance Regulatory Commission.

Foreign managers interested in partnering with domestic capital in China will need a strong track record and extensive relationships in the country, according to Treacy. He believes CapitaLand’s own long history in China gives the firm a comparative advantage in further growing the onshore RMB funds business. The firm, however, declined to provide performance numbers on its investments in China.

CapitaLand’s history in China can be traced back three decades, and it is well known for its nine Raffles City mixed-use developments. Today, CLI has built a team of more than 6,900 staff and 220 properties in over 40 cities in China. The country represents 36 percent of the firm’s S$132 billion in assets under management.

Eric Pang, head of China capital markets at JLL, says many domestic investors like the more sophisticated asset management style offered by foreign managers, but only the most experienced players are able to invest on behalf of these investors. “Of course, the Singaporean investors are among the most experienced foreign investors in the country. It is not about who is interested in investing with Chinese capital in China, but who is in the best position to do that,” he says.

‘Going in, eyes wide open’

Meanwhile, for foreign investors that can see through the geopolitical issues surrounding China, the market dislocation presents a window of opportunity, according to Treacy.

“Think of any investor groups like ultra-high-net-worth individuals, endowments, pension funds, the life insurance companies. There are always a few that will take a different view from the market and will say, ‘I understand the risk – I’m going in, eyes wide open.’ And a lot of very disciplined investors will have an allocation in their overall portfolios for special situations, and opportunistic investing as well,” says Treacy.

The CapitaLand China Opportunistic Partners Programme was set up specifically with these investors in mind. The program has a hybrid structure in which investors retain full discretion over their participation in each investment proposed under the program. Comprising a S$291 million single-asset fund and a S$824 million programmatic joint venture, the program secured S$892 million from top-tier global institutional investors. “The structure is reflecting that these are complex special situations, and the Chinese market hasn’t yet developed to the point where investors will give you discretionary capital,” Treacy says.

Through the single-asset fund, CLI acquired Beijing Suning Life Plaza, a mixed-use office and retail development in Beijing’s Central Business District, for 2.81 billion yuan in March. Treacy explains the deal happened because the seller needed to monetize the asset: “We could have transacted with the owner a long time ago but waited for the forced sale to provide a lower price.”

Finding potential in overlooked sectors

While CLI will continue to grow its portfolio in the new economy sectors, Treacy believes the investment potential of traditional sectors such as retail and office should not be disregarded.

Some of the most recent assets that CLI has purchased are in the office sector, including the Beijing Suning Life Plaza. In January, the Singaporean firm also bought a 10-building office campus known as The Springs Center in China from Tishman Speyer for $1.1 billion on behalf of its domestic investors.

“The big narrative of office is ‘out of favor.’ But when you actually get on the ground and look at the opportunities against what investors want in terms of returns and risk, that could be a very attractive sector that is overlooked and undervalued, and well below a fully loaded replacement cost,” Treacy says.

Growth outside of China

While CLI is making a concerted effort to ramp up in China, Treacy – with his global real estate investment background and network – was brought in with bigger growth ambitions in mind. Indeed, post-interview, he was heading off to South Korea and Australia for a month to meet with investors and managers.

“We want to grow in countries where it makes sense, where we see value for investors and where we have local presence and expertise. We’ll be responsive to what investors want, and at the same time be able to recommend to investors markets that they may not have a lot of experience in,” Treacy says.

He sees India as the next big growth story in Asia-Pacific, as more investors have been looking to expand into the country in lieu of China, given the geopolitical concerns around the latter, since the second quarter of 2022.

“With some investors uncertain about China, we see India and Vietnam being two of the beneficiaries,” he says.

In response to this, CLI has further boosted its exposure in India. For example, in December 2022, CLI’s Singapore-listed Indian property trust CapitaLand India Trust acquired a site in Chennai for 832.8 million rupees ($10 million; €9.8 million) to develop its third data center in the country. The trust will invest an estimated total amount of 19.4 billion rupees on the site acquisition and development project, which will occur in phases over the next four to five years.

“With some investors uncertain about China, we see India and Vietnam being two of the beneficiaries”

Simon Treacy
CapitaLand Investment

“Our latest data center was approved and permitted within 14 days, so we are very positive on India. We’ve been in India close to 30 years with over 300 people in five offices. We do see value in both income-yielding and development opportunities in the data center, business park and office spaces,” Treacy says.

As for Vietnam, Treacy sees good opportunities in retail condominiums and logistics. Despite Vietnam being a much smaller economy than China or India, the Singaporean landlord has also had more than 30 years of experience in the market. Last year, development arm CapitaLand Development partnered with the People’s Committee of Bac Giang province for a $1 billion industrial development.

“We’re seeing Vietnam going through the cycle where modern logistics is coming in to replace the old sheds. That’s probably one of the most predominant areas of development,” says Treacy.

Building a strong foothold in its home region is an important first step to becoming a global investment manager. “Asia-Pacific is our stronghold, where we’re most established and recognized. With our teams on the ground in all these countries, we are able to provide good views on what is attractive to satisfy different investor fund mandates,” he says.