Dr. Feldmann has over eight years of experience in finance, accounting and capital markets. Most recently, Mr. Feldmann was responsible for Timbercreek’s European real estate securities coverage in the Zurich office before transferring to Hong Kong to establish the company’s local Asian presence. Today, Daniel talks us through Timbercreek’s view on the APAC markets, and what assets are they finding attractive.
Dr. Daniel Feldmann, Director, Global Real Estate Securities, Timbercreek Investment Management Inc.; thank you for joining us this afternoon for a Q&A with The Yield. Could you please introduce Timbercreek to our readership?
Certainly, Timbercreek Investment Management Inc., together with the Timbercreek group of companies, is a global real estate investment manager with over $10 billion in assets under management. Timbercreek employs a value-oriented investment philosophy and specializes in providing conservatively managed, risk-averse, alternative asset class investment opportunities. We are headquartered in Toronto with offices in Hamburg, New York and Hong Kong and are focused on private equity and public securities in real estate. Out of Hong Kong we are covering developed markets of Southeast Asia and Pacific.
How are you weighted globally?
Our global real estate securities portfolio is predominantly focused on North America. 55% – 60% of our index weighting is in the USA and Canada. 20% in Europe, including UK, Ireland, Germany, Spain, France among others. Remaining 20% is invested into Asia Pacific.
Within Asia Pacific, we have our largest investments in Japan with ca. 8% of total portfolio expsoure. The remaining portion is invested in Singapore, Hong Kong and Australia. My team in Hong Kong is responsible for the Asia Pacific exposure in our portfolio.
What assets do you invest in?
The Timbercreek securities team invests in listed global real estate securities. We are investing in traditional real estate asset classes like residential, office, industrial, logistics and retail. However, we also look at specialty sectors that are less popular such as cell tower companies, data centres as well as public storage or social infrastructure. We are investing across the entire real estate spectrum.
How are you viewing the APAC markets right now?
We have seen several different impacts from COVID-19, and we find ourselves having different visibility in each country depending on the impact of the economy and the responses we are receiving from various governments and contacts on the ground.
Our best coverage in terms of visibility and exposure is New Zealand where the government took an early response to the pandemic. The country went into a rapid lock down, and consequently shut down most public real estate facilities. We are now seeing the first companies coming out with most recent appraisal reports in regard of real estate valuation, which shows expansion in capitalisation rates and values embedding higher uncertainty in respect of occupancy rates and cash flows.
In Australia, we have seen the government responding strongly in highlighting the relationship between landlords and tenants which should improve the health and support of especially retailers or small and mid-sized tenants going forward. The government’s charge in this dialogue has led to a published code of conduct which defines who is applicable for support and to which magnitude this support (rent rebates, deferral, jobkeeper subsidy) could be requested. This sets a base for cooperation and negotiation between tenant and landlord; a guideline seen as a starting point for a successful conclusion on how to continue business with each other.
Japan, however, has been rather late in adapting to the pandemic, given Prime Minster Abe san’s enforcement which results only in a state of emergency declaration but with no right to call for a full lock down. Daily habits and lifestyle seem to be less restricted than in other countries, especially given the nature and culture of Japanese workforce, combined with the behaviours of the Japanese work environment that calls for physical presence and long working hours. This is an interesting test case to see if this social distancing is doable or not. The information I get from the colleagues in Japan is that employees still go to offices where physical presence is required, however working from home is slowly becoming more acceptable. Malls and restaurants still seem to be partially in operation, while rent reduction or abatement requests particularly in the food & beverage or hospitality sector will require landlord and tenant to negotiate under which terms to continue business. Due to the rather late or undefined adoption of these measures in Japan, it does not come as a surprise that this is the slowest mover in how direct real estate valuation is currently being treated.
A look closer to home, Hong Kong has experienced limited restrictions, except pubs, bars, cinemas and other public and private entertainment facilities where we have seen restrictions in operations. We do have freedom of operations in discretionary and non-discretionary retail including food & beverage and there is widespread private and public sector support for working from home. The situation has changed significantly in Singapore where the government has come out with a new conduct that allows REITS to increase their aggregate gearing limit from 45% to 50%. Given the near term pressure to cashflows S-REITs are allowed to delay the implementation of a required maintenance of interest coverage ratio of 2.5x before being allowed to go beyond the prevailing 45% gearing limit up to 50%. The government was impacting the S-REITS legislation with looser gearing policy to serve the industry a better survival tool.
Is this happening in other jurisdictions?
Not so far, but this isn’t the only jurisdiction for direct support in REITS. In Japan, the Bank of Japan has been an active buyer of J-REITS for the past several years as part of its stimulus program. The Bank of Japan used to spend roughly JPY 90 billion per year on purchasing JREITS (under certain criteria) as part of their purchasing programme. As a consequence of Covid-19 it got announced a few weeks ago that the Bank of Japan will double this program to JPY 180 billion and can buy up to 10% shareholder ownership of a single J-REIT. This is more of an equity market stimulus tool as opposed to a survival kit of the economy; a stimulus tool for a listed market and not to save the individual company.
Would you say Japan and New Zealand are the two extremes in terms of market visibility?
Yes, with Australia closely following disclosures received from New Zealand.
What is attractive for Timbercreek now?
I am combining asset classes and countries in one here. What we clearly prefer are cash flows with a strong and steady recurrence over the next business years. We are in an uncertain environment with high volatility and prepared to slide into a global recession. We want to be positioned in companies with low leverage, good credit rating, healthy liquidity buffer and with strong visibility of recurring cash flows. For our underwriting, we apply the same methodology across our global investment universe.
Asset classes that match these criteria and attractiveness in certain markets include industrial, logistics and residential in terms of visibility of cash flow.
Now talking about niche scenarios, we recognize value in non-discretionary retail translating in daily necessity goods. We do prefer data centre exposure, with cell towers combined for our Hong Kong and Singapore exposure. In Japan we are still convinced that logistics, residential and small-to-mid size B grade office space will outperform the broader market. This sector should remain rather stable moving forward, particularly in Tokyo where office vacancy rate is at 1.5% and Grade B office type so far still attracts decent demand.
What are you avoiding right now?
Discretionary retail which is heavily impacted by tourism in Singapore, Hong Kong and Australia. Despite compelling share price valuations we do not feel comfortable yet to invest in hospitality. It has been significantly devalued but we believe more visibility is required before Timbercreek is ready to step back in. Japan hospitality stocks have already recovered more than 15% back on share price gains since the trough of the correction. However, this price still reflects an initial investment of ca. 50 cents on the dollar of net asset value. Reason for our cautiousness is in regard of the health of operators and the stability of fixed lease agreements combined with its impact on real estate valuation.