ULI Asia Pacific Chairman Ngee Huat Seek is chairman of the Institute of Real Estate at the National University of Singapore. He is also chairman of Global Logistic Properties (GLP), which manages 1,076 logistics parks across 118 cities in China, Japan, Brazil, and the United States as well as some US$37 billion in funds. After 15 years of service, he retired as president of GIC Real Estate, the real estate investment arm of the Government of Singapore Investment Corporation (GIC). The GIC is mandated to invest outside the city-state’s borders, with a long-term focus on diversification and capital preservation.
Q: Going back to your long tenure with GIC, where have most of its investments been?
When GIC first started in 1982, almost all of its real estate investments were in the United States. It was several years later that it began investing in Europe, but it was not until the late 1990s and early 2000s that it started to invest in Asia Pacific in a big way. It now has a well-diversified investment portfolio spread around the world.
Q: What type of investments are they?
GIC Real Estate invests in both the private and public markets and across different sectors, including office, retail, hospitality, residential, and industrial. What and where to invest really depends on the investment opportunities at the time and whether they meet the company’s global investment strategy.
Markets go through cycles, but opportunities are everywhere, even when a market looks expensive. It is a case of drilling down to look for the right assets that meet your investment requirements. It makes a difference whether you have a good operator on the ground, to be able to find the right investment, which is also a function of the investor’s time horizon—whether you are long-term or short-term focused. Investors are also constantly adjusting their return requirements in response to changing market situations.
Q: What are the biggest challenges in finding proper places to invest?
One of the big challenges is that we have been in a very low-interest regime for quite a few years. It is a very unusual period—money has been cheap, and therefore investors are more prepared to accept lower returns because of low interest rates. But interest rates are not going to stay low forever. At some point, in the medium to long term, interest rates are going to rise, and cap rates are expected to move up accordingly, although the magnitude of the increase is less certain. The fact is a small change in cap rates makes a big difference to the underlying value of assets, especially if the cap rate is low.
The other big challenge for the investment world is that organized savings have been growing rapidly. There is a lot of money accumulated in different parts of the world, particularly Asia, where you see very big institutional investors moving funds across borders to invest in different countries around the world. That has put pressure on cap rates. It’s going to get more competitive, with more institutional investors looking at cross-border investments.
Q: Will investors look to different markets? Riskier investments?
The supply of institutional-grade new assets is unlikely to keep pace with investment demand driven by the weight of money in the medium term. The supply of new assets, whether office buildings or shopping centers, is a direct function of occupational demand, not investment demand. In this respect, the fast-growing emerging markets in Asia, compared with developed markets, are likely to see much more new development in response to increasing demand driven by rapid urbanization and the increasing affluence created by a growing middle class. In more recent years, new developments are increasingly being built to investment-grade quality. With improving market maturity, such developments are also becoming targets for cross-border institutional investors.
However, new cross-border real estate investors tend to hit the established markets first. These are the gateway cities around the world: New York, San Francisco, L.A., London, Paris, Tokyo, Sydney, Melbourne, Singapore, Hong Kong. But as the competition intensifies and as investors’ knowledge builds up, their investment horizon will expand beyond these gateway cities to include those in emerging markets.
Q: That has been happening for several years, right?
Yes, but I think as far as the institutional investors from Asia are concerned, the growth in cross-border investment is relatively recent. If you look at the Chinese and Korean investors, I would say most of it happened in the last six to seven years or so.
Q: Do you have any concern that, because the interest rates have been so low for so many years, less experienced investors do not know anything except a low-interest-rate environment? How might that play out as rates change?
That is certainly one of my concerns, but not just with regard to less experienced investors. The problem here is that there are a lot of accumulated investable funds that have to be deployed, so it doesn’t seem to make sense to keep a lot of cash. You’ve got to find a profitable way to deploy this money, and once that investment decision is made, long-term investors have to live with the decision for a while. The other difficult question is whether to sell or not to sell when asset prices look high in many markets. But if you do sell, then what do you do with the cash? If you put it in fixed income, it’s not going to get you a lot of returns, while public equities look pricey as well, so that’s the conundrum. I think it’s a difficult period for investors.
Q: Is the stage being set for a decline in property values?
I think there is a risk of that if interest rates rise and cap rates rise in tandem. If rental growth doesn’t keep up to the same extent, then you will see a decline in prices, although investors have been adjusting their return expectations down in this low-interest environment, so lower rates of returns may be tolerated for a while to come. We don’t know when and how the current scenario will change, but I think interest rates are unlikely to shoot up very quickly, at least not in the next two years.
Q: How much growth are you anticipating in investable funds from Asia?
In Asia, institutionalized funds or organized savings are continuing to grow. Investable capital in pension funds, sovereign wealth funds, and insurance companies has been accumulating at an unprecedented rate. Take Chinese insurance companies, for instance; they have only recently been allowed to invest in real estate outside their country up to a limit of 15 percent of their total assets under management. An estimate is that $73 billion of additional investment would occur if the percentage hit 5 percent. This is only the start. If Chinese insurance companies invest 10 percent of total assets under management in real estate outside their country—which is reasonable compared with other countries globally—that would go to $154 billion. Here we are talking about capital outflows from insurance companies only; there are many more capital exporters in China.
In fact, I think the world could be seeing, probably for the first time in history, an emerging economy, albeit the second largest in the world, becoming a major source of capital outflows—not just into investments around the world, but also into buying businesses to help accelerate its shift up the value chain.
Q: Is all this new money causing market distortions?
The weight of money is one of the reasons why cap rates have now been so compressed around the world. For the really good assets, the yields have been historically low, although return expectations have also moderated downward.
Q: But people are investing anyway.
I think in part it is because expectations for returns for all asset classes in a low-interest-rate environment have also come down; so in relative terms, real estate returns look reasonable.
Q: If interest rates were to rise significantly, at least in the United States, wouldn’t it most likely happen because the economy would be doing very well?
Yes, with an improving economy some of the returns will come through rental growth. When demand is strong and supply is not keeping up, rents rise. And some of that would offset against rising interest rates’ effect on yields.
Hopefully, the change in values is not going to be as big, if much of that difference is translated through rental growth. A general acceptance of a lower risk premium by the market helps.
Q: And if the rental growth doesn’t happen?
Then you may have a problem with a more significant impact on values.
Q: Have you been concerned about the British vote to leave the European Union?
As expected, Brexit has created more uncertainties in an already troubled world, particularly for the U.K. and Europe. The fear of London real estate suffering a double whammy of a depreciated pound sterling and a drop in value came through almost immediately. However, the market will adjust over time as more buyers, motivated by the double-whammy effect, bid up prices, and the cycle restarts.
Q: What are your thoughts regarding the E.U. from an investment perspective? Has the establishment of the European Union been good for global investors?
The E.U., let’s not forget, is still a very significant economic bloc. Despite all the problems they have been going through in a very difficult period, it has for a few years now been offering good investment opportunities. But even within the E.U. countries, good-quality assets are also pretty highly priced, as reflected through the low yields or cap rates.
Q: Do you mean in countries such as Greece, Spain, and Ireland?
I was referring more to the nonperipheral countries like the U.K., Germany, and France. Certainly, places like Spain and Italy, for example, have suffered much more. Many opportunities are also from these two markets, although these markets have improved and prices have moved up, in general.
Q: Do you have any concerns about China?
Short-term, I think there are some issues. But in the long term, China is going to continue to grow, probably not at the same pace, but—and I certainly hope—better-quality growth. Their emphasis has shifted from quantity to quality of growth where the focus is more on increasing domestic demand through restructuring an export-oriented economy and moving up the value chain. Much more attention and thought will also be given to sustainability, social welfare, environmental issues, rule of law, and areas generally aimed at improving the quality of life.
Q: Is construction quality a concern there?
The quality of construction has improved in the last 20 years. Don’t forget that China has used top architects from around the world, and some of the most innovative designs are popping out all over China. In terms of the design and construction quality of buildings, they are now comparable to some of the best in the world. We have seen a vast improvement just over the last 20 years or so.
The quality of infrastructure in China is as good as anywhere in the world. The highways and high-speed rail are examples of the tremendous amount of resources poured into infrastructure, which is mostly internally designed and constructed, unlike landmark buildings, which have been mostly foreign designed.
Q: Do you think China will try to keep its economic growth level high, or might growth moderate?
I think they are beginning to accept the inevitability of a lower growth rate, and that the breakneck pace of economic growth was not sustainable. In any case, the Chinese government has admitted to the price it has paid for economic growth in the last 20 to 30 years as manifested by the environmental degradation evident in many parts of China.
However, I think they will fix their environmental problems sooner than we think, given that the government has put that as one of its top priorities. Cities go through these phases, and history has shown that they learn and fix these problems over time.
Q: What are you seeing in some of the smaller, less developed nations across Asia?
They are going through a stage that China went through 20 or 30 years ago. They are still very much involved in the lower-level value chains of production, but as their economies grow and their cost bases rise, they will similarly have to move up the value chain to stay competitive.
Even in China now, wages have gone up so much that the so-called global factories are becoming too costly for some manufacturers. So to stay competitive, they have to shift their operations either to the interior of China or to places like Vietnam or Bangladesh, or they have to depend increasingly on using robotics, for example. It’s not unlike what Singapore experienced. In the first ten to 20 years [following its independence in 1965], it went through the same phases of development, relying at first on lower-value production. In the last 20 years or so, Singapore moved even higher up the value chain in production and into financial services.
Q: What caused Singapore to develop that role as a financial center?
Singapore has very few, if any, natural resources. It is not enough to have a great geographic location, being in the center of Southeast Asia with a deep natural harbor and a hardworking migrant population. It continues to diversify its economy and move up the value chain by moving to higher value-added manufacturing, capitalizing on its locational advantage to develop itself into a regional transportation and financial services hub. Over the years, many resources have been directed toward education and training to enable this transformation.
Singapore also directed a great deal of resources to developing itself as a financial center, initially for Southeast Asia, then for Asia, and now globally. Fund management and wealth management, apart from banking, are the two more recent developments in which Singapore has some comparative advantages. Apart from its geography, Singapore also has a strong pool of talent—a workforce trained in finance that international companies can rely on, along with the country’s excellent hard and soft infrastructure—banking, legal services, ease of business, and so on. The country has a robust British-based legal system and a good judicial system, rule of law, and great transportation and communications. All of these attributes are very important for operators in the finance industry.
Q: Is there anything else you would like to address?
I am honored to take on the role of ULI Asia Pacific chairman. It is indeed very timely for ULI to deepen its presence in the Asia Pacific region under its new global structure. Urbanization is happening at an unprecedented pace and scale, while a rapidly growing middle class that is better educated and more affluent is demanding a high-quality urban environment.
ULI’s reservoir of expertise—accumulated over 80 years, though principally mature-markets focused—provides a rich source of knowledge for finding solutions to issues and problems confronting the cities and communities in the region. Over time, I hope the unique solutions and experiences of its rapidly urbanizing emerging markets will add significantly to this knowledge reservoir, making it truly global.
However, a great deal more effort needs to be put into promoting the ULI brand name throughout the region, both in deepening its presence in existing markets and expanding to new markets, including India, Indonesia, and Indo-China. Much needs to be done. But we are excited about the prospects and opportunities!
Elizabeth Razzi is editor in chief of Urban Land.
