Real Estate

The global real estate market recorded its ninth consecutive year of growth, albeit amid signs of slowing momentum as the cycle continued to mature.

Key metrics pointed to a gradual cooling of activity, with a nuanced and varied story playing out at a regional level and between asset types.

Case StudyH-CARE Platform

In India, mass urbanisation, rising wages and a rapidly growing middle class have led to a significant shortfall of housing supply. In 2015, the Indian government estimated that shortage to be up to 20 million homes, and analysts forecast up to 40 million affordable and mid-income homes will be needed to meet demand over the next seven years.

Addressing this issue has been a longstanding priority for the Indian government. Over recent years, numerous policies under the ‘Housing for All by 2022’ initiative have aimed to support residential construction, improve affordability and ultimately boost housing supply.

One key impediment for construction companies and developers has been a lack of financing options for purchasing land and funding early stage, pre-approval schemes.

In January 2016 and December 2017, ADIA completed investments in two funds: HDFC Capital Affordable Real Estate (H-CARE) 1 and 2. In total, the two funds form a $1 billion platform that aims to meet demand from developers for flexible funding, targeting both equity and debt opportunities in affordable and mid-market for-sale residential projects around India.

HDFC is one of the largest mortgage lenders in the country, with extensive relationships with leading development companies as well as in-house construction and project management expertise.

Since the H-CARE platforms were launched, they have supported the development of more than 43 residential projects and 130,000 units across six states in India, providing financing solutions to developers to meet their capital requirements.

In 2018, 11 investments were completed in the Mumbai Metropolitan Area, National Capital Region, Bangalore, Pune and Kolkata. India’s National Investment and Infrastructure Fund (NIIF) also joined ADIA as an investor in H-CARE-2, further strengthening the platform.

The platform entered 2019 with a strong project pipeline, with further investments planned to continue supporting the development of mass-market residential projects.

While capitalisation rates in 2018 matched the record levels of the past two years, prices of U.S. assets came under more pressure than those in other markets as rising interest rates squeezed margins. Meanwhile, strong demand for industrial and residential assets was offset by an equally steep decline in retail and stagnating prices for offices.

Average vacancy rates remained at historically low levels, due in part to relatively low construction activity since the financial crisis and steady growth in demand.

Dry powder, or funds available for investment, also hit a record high, as capital raising continued apace, suggesting that investor appetite for the asset class remains robust. This pent‑up demand may help to underpin the market and improve the chances of a soft landing as prices drift back from their highs.

In line with its long‑term focus, ADIA’s Real Estate team continued to manage its portfolio and direct its activities in ways that seek to capture the industry’s future growth trends. This included selling certain assets to make room for new investments in emerging or high-demand areas.

The success of this approach was shown in 2018, with new investments achieving average equity‑weighted internal rates of return (IRR) of more than 10%.

Material progress was also made at several of ADIA's development projects, including the Territoria Apoquindo mixed use project in Santiago, Chile, in which ADIA holds an 80% stake. In Asia, development of the mixed‑use Paya Lebar quarter in Singapore was completed in late 2018. Separately, the 60‑storey One Museum Place office tower in central Shanghai was completed last year and was already more than 50% leased by the end of 2018 (see case study). In the Hospitality sector, the 29‑storey Four Seasons Hotel in Sao Paulo, Brazil, opened its doors to guests in October after a three‑year construction process, boasting 258 rooms and 84 private residences.

Market volatility in 2018 led to periods of pricing dislocation between public and private real estate, resulting in relatively attractive entry points for new acquisitions during the course of the year.

The Real Estate team also continued to seek out opportunities in emerging markets, encouraged by tangible improvements to legal frameworks. China, in particular, remained a key focus, with ADIA’s overall real estate exposure up by one third over the past two years alone.

As 2019 began, real estate market fundamentals remained well supported, as the weight of capital seeking quality investment returns continued to grow. However, yields are likely to remain under pressure across the sector with resulting implications for our investment strategy.

Case StudyOne Museum Place

One Museum Place is a 60‑storey office building in central Shanghai that opened in 2018 after a five‑year development process.

Majority‑owned by an ADIA subsidiary and a leading global developer, the prime Grade‑A tower forms the centrepiece of a new commercial zone – the Suzhou Creek Riverfront Hub – in downtown Shanghai.

Built to conform to the highest international premium standards, One Museum Place also includes an adjacent retail podium spread across six floors and provides direct access to a new subway station.

In total, One Museum Place provides almost 140,000 square metres of leasable area, helping to meet the demand for quality office space in central Shanghai, one of the world’s fastest‑growing cities.

The project embodies many of the core attributes that ADIA brings to its investments, including patience, and an ability to provide solutions in complex situations.

ADIA acquired the site in 2013, following a competitive government‑run bidding process. Its success was partly based on its ability to provide a fully funded proposal and a compelling vision for the site that aligned with Jing An District and city‑level objectives.

The building is one of the first in Shanghai to be certified LEED Platinum, the highest standard of environmental efficiency, and includes advanced air filtration systems that aim to provide the best possible working environment.

Among tenants to sign leases during 2018 were Shanghai financial services group Guotai Jun’an Securities and its subsidiary Guotai Jun’an Futures – which will take multiple floors – global pharmaceutical firm Pfizer, and a subsidiary of fast‑growing Chinese tech firm Tencent. Other tenants include venture capital firms, consulting companies, architecture firms and advertising agencies.

The official opening of One Museum Place is due to take place later in 2019, at which time the leasing process is expected to be largely complete and the retail podium fully operational.

As in 2018, ADIA’s real estate team will seek to balance its emphasis on portfolio and asset management with selective acquisitions in areas with long‑term growth potential. Meanwhile, we will look to deploy additional capital to existing, high potential assets, while continuing to assess new opportunities in line with our philosophy of “global relative value”.

As the cycle continues to mature, the team will seek to maintain leverage on individual assets at moderate levels to reduce the need for future refinancing. It will also continue to take advantage of favorable capital markets to optimise leverage on its portfolio and extend maturities.

Emerging markets will remain a key focus in coming years, particularly China, India, and Latin America, where growth will be driven by urbanisation, a growing middle class and increased consumption.

We expect demand in both developed and emerging markets to remain strong for industrial assets, including logistics. As e‑commerce continues to increase its share of the retail market, so will the need for larger and technologically superior warehouses, with efficient goods handling and last‑mile delivery solutions. The Real Estate team is also positive about the prospects for the residential market, as population growth and urbanisation fuel substantial and growing demand for affordable housing. Within this sector, we expect growth to be increasingly concentrated in multi‑family and student accommodation in developed markets, with build‑to‑sell residential projects a key focus in emerging markets.

In the office market, technology is expected to play a central role in dictating how workplaces of the future will look. The growth of co‑working means tenants will demand flexible workspaces and leases, requiring more technologically advanced buildings that can adapt to shrinking or changing workforces.

In the hospitality sector, global demographics and changing consumer preferences for services and experiences are driving tourism and travel spend growth above that of GDP growth.

Meanwhile, the retail sector faces some of the greatest challenges in coming years as consumers increasingly migrate to online shopping. However, retail assets that dominate their catchment area offering a strong mix of food and beverage, entertainment and non‑discretionary goods are likely to remain relevant.

Case StudyH-CARE Platform

In India, mass urbanisation, rising wages and a rapidly growing middle class have led to a significant shortfall of housing supply. In 2015, the Indian government estimated that shortage to be up to 20 million homes, and analysts forecast up to 40 million affordable and mid-income homes will be needed to meet demand over the next seven years.

Addressing this issue has been a longstanding priority for the Indian government. Over recent years, numerous policies under the ‘Housing for All by 2022’ initiative have aimed to support residential construction, improve affordability and ultimately boost housing supply.

One key impediment for construction companies and developers has been a lack of financing options for purchasing land and funding early stage, pre-approval schemes.

In January 2016 and December 2017, ADIA completed investments in two funds: HDFC Capital Affordable Real Estate (H-CARE) 1 and 2. In total, the two funds form a $1 billion platform that aims to meet demand from developers for flexible funding, targeting both equity and debt opportunities in affordable and mid-market for-sale residential projects around India.

HDFC is one of the largest mortgage lenders in the country, with extensive relationships with leading development companies as well as in-house construction and project management expertise.

Since the H-CARE platforms were launched, they have supported the development of more than 43 residential projects and 130,000 units across six states in India, providing financing solutions to developers to meet their capital requirements.

In 2018, 11 investments were completed in the Mumbai Metropolitan Area, National Capital Region, Bangalore, Pune and Kolkata. India’s National Investment and Infrastructure Fund (NIIF) also joined ADIA as an investor in H-CARE-2, further strengthening the platform.

The platform entered 2019 with a strong project pipeline, with further investments planned to continue supporting the development of mass-market residential projects.

Case StudyOne Museum Place

One Museum Place is a 60‑storey office building in central Shanghai that opened in 2018 after a five‑year development process.

Majority‑owned by an ADIA subsidiary and a leading global developer, the prime Grade‑A tower forms the centrepiece of a new commercial zone – the Suzhou Creek Riverfront Hub – in downtown Shanghai.

Built to conform to the highest international premium standards, One Museum Place also includes an adjacent retail podium spread across six floors and provides direct access to a new subway station.

In total, One Museum Place provides almost 140,000 square metres of leasable area, helping to meet the demand for quality office space in central Shanghai, one of the world’s fastest‑growing cities.

The project embodies many of the core attributes that ADIA brings to its investments, including patience, and an ability to provide solutions in complex situations.

ADIA acquired the site in 2013, following a competitive government‑run bidding process. Its success was partly based on its ability to provide a fully funded proposal and a compelling vision for the site that aligned with Jing An District and city‑level objectives.

The building is one of the first in Shanghai to be certified LEED Platinum, the highest standard of environmental efficiency, and includes advanced air filtration systems that aim to provide the best possible working environment.

Among tenants to sign leases during 2018 were Shanghai financial services group Guotai Jun’an Securities and its subsidiary Guotai Jun’an Futures – which will take multiple floors – global pharmaceutical firm Pfizer, and a subsidiary of fast‑growing Chinese tech firm Tencent. Other tenants include venture capital firms, consulting companies, architecture firms and advertising agencies.

The official opening of One Museum Place is due to take place later in 2019, at which time the leasing process is expected to be largely complete and the retail podium fully operational.