The pandemic has had profound impacts on the real estate sector in Singapore and across the region. From plummeting demand for traditional commercial real estate at the peak of the pandemic to burgeoning rentals for residential real estate, there are several trends underpinning investments in the real estate sector.
We speak with Lim Su Kiat, founder and chief executive officer of Singapore-based private equity real estate firm Firmus Capital, to understand the trends shaping different types of real estate in Singapore and the region, and how investors are building their portfolios in the sector.
Unravel: Would you say the attractiveness of private real estate has increased as an asset class?
Lim Su Kiat: Yes, I think it has. From an investment perspective, real estate can be an asset class that generates higher returns. And it allows for asset diversification. Although it’s a widely held notion that real estate is a high-risk kind of a play, particularly in developing economies, this isn’t really the case in more mature economies. Given all that’s happening globally, private real estate provides a good diversification play for portfolios and institutional investors.
In recent years, we’ve seen continued growth in institutional investment in the real estate space, particularly in the growth of non-traditional asset classes such as student housing, gated centres, healthcare offices, co-living spaces and assisted living communities, for example. In many ways, these types of assets have underpinned the growth of real estate as an asset class over the past few years. Of course, there’s also data centres that are seeing great interest.
Unravel: How has COVID-19 impacted the real estate market? In particular, is there a disconnect between what’s happening in the real economy and what’s happening in the real estate market? Broadly speaking, we expect the real estate market to boom when an economy is in good shape, but this is not really what we see. Can you help explain the disconnect in the context of Singapore?
Mr Lim: Yes, there are multiple approaches to answer that question. You are right to point out the current dynamics underpinning what’s happening in the real estate space. I think one has to also look at the various destruction that has happened and supply chain constraints. Additionally, there are demand issues as well, and all of this is underpinning an inflationary outlook. So this is because of a confluence of factors.
Broadly speaking, real estate has a high degree of interconnectedness, as well as links to the overall macro economy and the financial markets. This is almost like a complex web of interconnecting parties including users, developers, financial institutions providing capital, to a wide spectrum of investors. Everybody is a real estate user in some form or other, whether at home or work or when shopping or dining. Even indirectly, we are using data centres, for instance.
In the residential space in Singapore, there has been quite a lot of pent-up demand, or demand that was not taken up due to various reasons. Now people are able to travel and employment hubs like Singapore are seeing dislocations in the rental space as a result of sudden spikes in the number of people looking to work here. On the supply side, there have been constraints in terms of new supply coming on stream because of COVID-led disruptions that have impacted construction. Take for example, labour constraints witnessed in Singapore. All of this puts pressure in terms of the number of available units. Of course, I think over time, things will normalise and we will be back in equilibrium.
Unravel: With many employees returning to the office (either full-time or part-time) sooner than expected, are we seeing a recovery in the commercial real estate segment?
Mr Lim: Yes, we are seeing the early stages of recovery. We’re seeing more decentralised work arrangements. We see this in Singapore, with some companies providing employees the flexibility of being located off-site and therefore reducing their office sizes in the city centre. But what happens is that employees go on to look for other types of space in non-traditional office settings, such as WeWork, for example. So what we’re seeing is a shift in demand, with more co-working spaces proliferating because there’s increased demand for such spaces.
We’re also seeing occupiers take up multiple locations rather than a large, central location. This too is resulting in a shift in demand. Demand has not really dissipated, but has taken different forms.
Separately, we’re also seeing a recovery in traditional office, commercial retail and hotels as things have opened up, and this is expected to continue.
Unravel: What challenges do you see for private equity real estate managers in Asia-Pacific? Is deploying capital harder now than during the pandemic? Are there other challenges?
Mr Lim: Yes, there are multiple challenges, unfortunately. The key difference between prior to the pandemic and now is that we’re dealing with a period of rapid inflation and a corresponding increase in interest rates. In normal circumstances we see inflationary pressures in periods of economic expansion. At this point, we’re seeing inflation being underpinned by several disruptions. Additionally, we’re seeing challenges in the pricing of assets as a result of the high interest rates.
That said, real estate actually performs well in a rising interest rate environment, particularly where assets are income generating. This is because in an inflationary environment, rents also see an inflation adjustment, so there is growth in the underlying rents. In this sense, real estate has always been good as a hedge against inflation. There is enough empirical evidence to demonstrate that real estate can yield a positive return that is higher than consumer price inflation.
Unravel: Did COVID-19 result in a change in your investment strategy?
Mr Lim: Yes, it’s not the strategy so much, but I think it has had an impact on how we look at investments and how we evaluate them. We need to understand the underlying changes in trends resulting from COVID. Understanding their implications is also important. Take the example of flexible working arrangements. That was a mega trend last year, with everyone working from home and all the talk around flexibility—I guess the takeaway was that when people come back to office, as a supplier, one needs to improve and enhance what is offered in terms of air circulation, more collaborative and open spaces, and better amenities. There have been many such changes.
When we look at investment, we look at the quality of a building with a consideration for emerging trends and concepts. How can we turn a particular development into maybe more of a mixed-use development where one can work, play and live? Integrated developments are going to be increasingly popular.
So COVID has changed how we evaluate investments. In the retail space, we see several changes, such as the proliferation of food kitchens that centralise cooking, for example. The amount of space required for food establishments has declined as a result. I suppose one of the positives to have come out from the pandemic is efficiency.
Unravel: Can you talk us through how retail real estate is changing?
Mr Lim: What we are seeing is a shift—not a change in terms of an increase or decrease—in the appetite for retail-oriented real estate, in terms of what the same space can offer differently. There is opportunity in repurposing a particular bit of real estate to meet unmet demand out there. And as I said earlier, we’re social beings with a need to interact with people—malls play an integral role in this.
In fact, we are seeing some of this in commercial real estate as well, with companies looking to incorporate elements of lifestyle because people want to have a little bit of everything where they work, be it food options, gyms, open green spaces and the like. People want this convenience of amenities. In my view, this is still an unmet demand.
Unravel: What is the key driver of the push towards ESG investing?
Mr Lim: The first driver is increased global awareness—you can see that everybody is more conscious and more aware. It is no different with limited partners/ institutional investors, but the primary objective of any investment made by a pension fund, for example, is still to see returns. Returns are measurable. For investors that want to focus on ESG, the approach to that is to consciously allocate capital towards more thematic kinds of funds that are making a conscious effort towards very specific ESG-related investments. I think there are now many targeted products and funds that are going in that direction.
More broadly speaking, everyone is looking to play their part in the overall ESG context. Of course, we want to reduce our carbon footprint as much as possible and reduce energy consumption, but that’s also because it hits our bottom line and we don’t want to waste resources unnecessarily. In this manner, many are indirectly focusing on ESG-related initiatives. This is increasingly common around the world.
The question for an investor really is what is your overall ESG value proposition? Do you want your ESG focus to also translate into ROI, or are you willing to forego some of that to construct a more direct ESG-focused portfolio.
Lim Su Kiat
Su Kiat founded Firmus Capital in 2017. He spearheads the firm’s investments and provides key leadership and strategic planning. His rich expertise over 17 years in the real estate industry spans fund management, deal origination and structure, land and retail economics. Before Firmus, Su Kiat co-founded Rockworth Capital Partners in 2011 and was its chief investment officer. He grew the firm’s portfolio to A$1 billon in Australian commercial assets. Before that, Su Kiat worked at major leading real estate investment managers – as investment manager at Frasers Centrepoint Commercial, and as director of investment and deal origination at Singapore-listed Allco REIT (now Frasers Commercial Trust).