GIC 'underinvested' in real estate, eyes deals in key gateway cities

Singapore

SINGAPORE sovereign wealth fund GIC on Wednesday said that it is "underinvested" in property. Real estate currently makes up 7 per cent of its asset mix. It plans to raise this proportion to 9-13 per cent.

It will do so by looking at big transactions in deep and liquid markets in key gateway cities. Emerging markets will also be important for its long-term strategy, notwithstanding short-term geopolitical risks.

GIC will also continue to partner global players, including private equity firms and other sovereign wealth funds, on bigger deals as competition heats up for global assets.

Goh Kok Huat, chief operating officer and president of real estate at GIC, shared these plans at the Asia Pacific Real Estate Association (APREA) summit on Wednesday. The discussion he had with a moderator was rare, given GIC's reticence about its investment strategy.

GIC manages Singapore's foreign reserves. It will only say that it manages "well over US$100 billion" of assets, but research firm Sovereign Wealth Center puts its total holdings at US$343 billion.

Mr Goh said he is "quite fortunate" that the underinvested capital allocated to real estate is not charged any cost of capital, otherwise it might force his team to "push money out the door regardless of valuation".

He believes in staying disciplined when investing, especially in getting in at the right price point. GIC Real Estate has no specific focus on any segment of the real estate market. Its litmus test when deciding to keep or give up an asset when reviewing its portfolio each year is to ask itself: "Can I continue to add value to generate more returns from it?"

Given GIC's size, the fund said that "transactions of scale" are more efficient for it. It has tended to invest more in key gateway cities not because of an investment mandate but because, with a limited staff strength across the globe, it needs a sharper focus.

"If we believe that alpha is truly rare, and with 150 people around the world, we have no choice but to focus on key markets that are deep, where the transactions are a lot more, because then we can get the local team to be experts in those markets," said Mr Goh.

He believes a strong team that understands the local markets is consequently able to underwrite complex transactions better, and gain access to more attractive deals in future.

Partnerships are also important to help it scale, especially in today's market with more global players able to write fatter cheques and the competition for assets heating up.

GIC collaborates where it can. For example, in May this year, it paired up with Canada Pension Plan Investment Board to buy the D-Cube Retail Mall in Seoul for US$263 million.

Early this year, GIC teamed up with Global Logistic Properties to buy Blackstone Group's IndCor Properties Inc, one of the largest logistics platforms in the US, for US$8.1 billion.

Last year, GIC sealed a deal to buy office space in New York City's Time Warner Center with two partners, the Abu Dhabi Investment Authority and US real estate firm Related Companies, for US$1.3 billion.

And since emerging markets will become the largest contributing bloc to global GDP growth, any investor with a long-term horizon has to pay attention to this space, which is what GIC is doing, Mr Goh added.

For these markets, GIC has to consider whether geopolitical risks will lead to long-term deterioration of fundamentals.

"If they do, then we would be very concerned, but if they don't, given we are long-term in nature, it's about riding out the short-term volatility . . . we are mindful of the short term but our eyes are on the long term," Mr Goh said.

Asked about his outlook for global real estate, he said that interest rates have fallen over the last 20 years and are even negative in real terms in many places. There is nowhere to go but up.

"When rates rise, at some point the spread between cap rates and bond rates will compress, and after it's compressed and there is no more spread left, cap rates will move up.

"For us, what that means is we must be very disciplined in looking at every asset and determining in the long term which assets have income growth left in them. Because when cap rates move up, you need income growth to shelter the impact of cap rate movements."