Navigating Through Choppy Waters with RealVantage

Due to recent developments of the pandemic and in keeping with social responsibilities, we are hosting a webinar instead of a physical event. You are cordially invited to join us where we will introduce our platform and the team behind it.

More importantly, we will be sharing our views on real estate investment in the current context of the COVID-19 virus and its impact, drawing upon the rich experience of industry veterans from RealVantage’s investment team who have invested through various cycles on behalf of institutional investors previously.

Watch our webinar and meet the team at RealVantage as we share with you our investment strategies and approach especially in the midst of the current global downturn.

About The Speakers

Keith Ong | Co-Founder
Keith is an industry veteran with over 20 years of experience, he has transacted in excess of USD 3 billion across geographies, sectors and the entire real estate investment spectrum. He was the Assistant Director of Investment in ARA Asset Management, Director of Investment in Rockworth Capital Partners, and the Director of Investment Management and Capital Transactions for Firmus Capital.

Mark Ho | Managing Director - Investment & Asset Management
Mark has over 16 years of experience spanning cross-border investment, research and strategy, he has advised on and executed transactions in excess of USD 800 million across multiple asset classes and investment strategies. He was involved in the investment, research and strategy while under Pacific Star Group, capital market transactions and investment research in JLL, and real estate private equity in Deutsche Bank.

Transcript

0:00
Keith

Hi everyone, this is Keith here. Good evening and thank you for taking the time to join us today. I hope everyone is keeping well and staying safe. It is volatile now in the stock market. I hope everyone is not too stressed. So today, we keep this session light-hearted and casual. I'm the co-founder of RealVantage. Together with me is my colleague, Mark Ho. A quick introduction about ourselves:

I've been in the real estate fund management business for the last 20 years, I’ve spent a large part of my career in ARA and we used to invest on behalf of institutions such as pension funds, sovereign funds, and largely in the investment in an asset management space.

I'll let Mark talk about himself.

0:48
Mark

So hi everyone, similar to Keith - I've also been pretty much in the real estate private equity space. So besides investments, I have spent a significant proportion of my career in research and strategy, advising the funds on how they should invest through the cycles.

1:09
Keith

Right. Now, let's jump into the webinar.

All right, for today, we will cover four parts. First, I will give a quick introduction to the platform and the team. Next, we'll jump into the impact of the virus and its implications on the real estate sector. And third, we'll talk about our outlook and investment strategies.

And finally, we will cover a Q&A section. So please feel free to post your questions. For those on your phones, just swipe right and there will be a section that pops up for you to post your questions. Please feel free to post your questions. We'll address them at the end of the day.

All right, let's start.

Firstly, what is RealVantage all about? RealVantage is essentially an online real estate platform that allows investors to invest in offshore real estate. How we do it is very different.

First, we allow fractional ownership. So this allows you to come in with a smaller investment quantum and you can invest across different sectors, different countries and different types of assets.

Next, RealVantage acts as your real estate fund manager. We will do the acquisition and asset management through the investment period, and at the end of it, we will divest the assets on your behalf. We do all the heavy lifting so you don't really have to worry about it. Next, more importantly, we pride ourselves in providing what we call quality investment-grade deals. These are what we call institutional quality deals that provide better risk-adjusted returns.

Let me highlight two key benefits we bring.

Number one is diversification.

In real estate, we sincerely believe that diversification is the best way to manage your downside risk. So we offer you diversification in the following ways. Number one, you can decide on the amount to invest in each deal. Our minimum investment is as small as 25,000 dollars.

Next, you can decide on the sectors to go into retail, residential, office or industrial. Third, you can decide on the countries you want to invest in. It could be Australia, the UK or even the US, and fourth you decide on the more risk you want to take. And I'll talk about this later in the next slide. Next, we believe this platform allows you to access deals you don't normally get.

So there are many ways to invest in real estate across the value chain and across the capital structure. For example, If you could greet others and take ownership of a larger asset you should normally do on your own, such as buying a building in by bidding in London, for example. Or you could take part in a joint venture with the developer to build and sell townhouses.

So you act as a developer or you could invest in the former debt structure providing loans to developers, so you are like a bank itself. In addition, you can also invest in other property funds, which require a high investment quantum. So through our years of contacts and network in business with developers and fund managers, we can unlock these institutional deals for you you cannot be doing on your own. Going back to the deal types that we offer.

Just to highlight our deals are typically offered in three different categories. At the end of the spectrum, at the lower end of the spectrum, we have what we call core deals. This is essentially stabilised income-producing assets, the returns are usually 7 to 9% per annum, right - moving up the spectrum you have value-add deals, this involves some fix up to the asset, or it could be repositioning or changing the deal structure.

Returns for this asset ultimately range between 12 to 15% banner. And right up the spectrum, we call opportunistic steals, returns are usually over 20%. But what are these some of these deals essentially these are like development deals doing ground-up deals right? Or it could be distressed assets that we take down right. Next, let me give a quick introduction to the team. So on the team itself, we have an average of a hundred years of experience, both in real estate fund management business, data science and technology. Right.

We are very privileged to have two esteemed industry veterans, Anthony Ang and Richard Tan. They sit on our investment committee. Anthony's currently the CEO of Sasseur REIT and Richard Tan was the former CFO of Suntec REIT for some of our experiences we have a couple of us have been in a very real esteemed organisation such as GIC, Deutsche Bank, Barclays Bank, and ARA.

In terms of our investment track record as a team, we have invested in real estate across the Asia Pacific in Australia, China, Malaysia, Singapore and also run up the UK. Right. Next, we just jumped into the impact of the virus. Now I hand over to my colleague Mark who will take you through the next two sections.

6:45
Mark

So in this next section, I will share some of our thoughts surrounding COVID-19 and its implications. It is a massive topic and I might not be able to cover it as comprehensively as I'd like to. But please feel free to fire off whatever questions. And we will try to address them during the Q&A session at the end. Now, first things first, although closely related, it is important during this discussion to distinguish between the health crisis itself, the ensuing impact on the real economy, which could last long after the virus is gone, and the consequences on real estate pricing.

Now, the flattening curve is important to a chart that gives us an idea of where the virus situation is. The vertical axis tracks the total number of confirmed cases while the horizontal axis tracks the time elapsed since the first case was observed. Now, the idea for situation control is to impose protective measures, such as social distancing to manage the number of virus cases such that it does not exceed the healthcare capacity threshold and they eventually taper off with you. So, obviously, this is a very fluid and a rapidly developing situation.

Now based on the latest data we have, which is of yesterday. You can see from the chart on the top left-hand corner the situation in Asia is stabilising with most countries on the path to containment. In fact, China just announced yesterday that the lockdown of Wuhan, the ground zero of the pandemic will be lifted on April 8, marking a very significant milestone in the battle against the outbreak. Now the risk of second waves remains. However, given news of our suspected under-reporting and things like mass gatherings, although governments have largely put a lid on that.

As you can see from the chart on the top right-hand corner, Europe remains some way from getting a handle on things. But the situation has evolved encouragingly, with most countries leaning more towards the right side of the flattening curve. Hopefully, we see more pronounced inflexion points in the near future. In the US, the unabated growth trajectory of virus cases is a source of major concern for us.

For perspective, the US accounts for 60% of global demand, and the consumption sector itself is larger than the entire GDP of China. So we can be certain the repercussions on the global economy will be more severe than it already is, if the situation does not get under control, so now, we don't want to talk about political things here.

But from an investor viewpoint, thankfully, many state governments including some of the largest and most populous states, like California, and New York, New Jersey, Massachusetts, Michigan, have already taken strong measures to control the situation. Now there is a good chance that a number of cases in the US will surpass all other countries, but we are optimistic that the effects of continuing measures would show up in the data soon.

Australia remains on a steep growth trajectory. Doubling cases every three-plus days. But we remain optimistic given the relatively small number of cases, as well as the swift and aggressive actions taken so far by the government to get things under control. In fact, measures in Australia have been even more Draconian than Singapore. So here we are looking at the VIX index, administered by the Chicago Board Options Exchange. It is a popular measure of the stock market's expectation of volatility based on the SMP 500 index options.

But to us, it's also a good proxy for volatility as well as risk appetite for the wider financial market. Now, with the current state of flux and uncertainties, it should be no surprise that the market volatility has been through the roof. Reaching limits only last seen during the GFC. We expect things to meaningfully start to subside only after most major economies are past the inflexion point in the flattening curve.

Now, despite the heightened volatility, a silver lining that we see compared to the GFC is that the degree of uncertainty in the current episode does not reach as deep. Now, back during the GFC, the degree of toxic financial contagion was almost impossible to figure out, as even the top investment grade instruments proved to be corrupted. Credit markets totally froze overnight. But in the current episode, banks are still displaying a willingness to lend and to do business. Although that's not to say that the credit markets are a hundred percent healthy, we will talk about this later.

This you're looking at a tabulation of the historical peak-to-trough cycles during times of extreme duress, just like this one. And we just had to put things in perspective. We use the S&P 500 as our indicator here, but the observation points are replicated in just about any other major stock indices in the world.

So you can see that the market fell by as much 86% during the Great Depression, almost 57% during the financial crisis, and 49 and 48% during the.com bubble burst and the 70s oil prices. Now in this current episode, the SMP has fallen by 27%, as of today, so 32% was a few days ago before the US announced stimulus measures. And a few things that we have to say about this.

Looking at virus situations in the US as I've shared earlier, there is a further downside circling path of the course. The pace at which stock markets have plunged is unprecedented. It's only taken one month to see 32% coming off the stock index. Now, to a large extent, we think this reflects just how globalising interconnected the world is today. It's also a manifestation of how precarious and for Joe, the economics tuition was before the virus arrived.

So although the labour markets were seemingly healthy, the wage growth and productivity have actually been relatively subdued for years now. And not to mention the extended low-interest-rate environment in the GFC Aftermath had also sent pricing across just about every asset class with very rich levels. So in a way we see it as an extendable run due for a correction.

Now, notwithstanding the severity of the swing, there is room to argue that from an investment perspective, quick corrections are still better than a slow burn situation. And in some ways, this is like hitting a reset button as far as valuations are concerned.

Now, one very important thing to note is that the credit market has not dried up. This is a very important point, obviously, because credit availability is the lifeblood of just about any economy. Now in stark contrast with the GFC episode, the health of the credit market is in a much better shape today. No pun intended, but credit goes to governments around the world who have been very swift to launch our measures to ensure that the credit market machinery remains well oiled. Having learned a precious lesson from the previous downturn.

Now banks remain open for business. Blackstone just completed a very significant deal earlier this week and, in Australia in the US, people are looking to refinance their mortgages to lower interest rates. And this is overwhelming the banks there now.

Yet we do not expect credit availability and pricing to be uniform throughout areas of the economy being particularly vulnerable have already experienced the withdrawal of credit. I a moral example is ego hospitality, which is our list in Singapore, which went into default earlier this week and now needs to liquidate assets just to generate cash flow. Now to have some sense of the impact on the real economy, we have to look at China, given that they were the first to enter a lockdown.

So for a month of January and February period, compared to a year before industrial output a decline 13.5% FAI (Fixed Asset Investment) has come down 24.5% and retail sales have tumbled 20.5%. So China is now only struggling to get back to work after the lockdown. So unsurprisingly, alternative and industrial sector data show a sluggish recovery with most of the most areas of activity well below the usual levels.

In the graph, you see that the current data for 2020 is a superimposed on previous year's data and the shaded areas, the gap between where they should have been and where they are today. So, the data shows that the economy is pretty much-operating levels there are about 20 to 25% below where they normally should be and putting things in perspective.

China being a single-party political party country was a to get a handle on a situation relatively early, so a bigger concern for others slower reacting capitalist countries could be that by the time you come out of lockdown, the economies could very well reset to levels even less than 75% of where they were before the virus arrived. And without external help, businesses may no longer be there and people have no jobs to return to. As it is, jobless claims the US are already through the roof. And the treasury secretary is predicting unemployment to reach 20%.

So averting such an economic crisis, you can see from the map here. Ever since the start of the year central banks around the world were quick to slash policy interest rates. And in addition to the monetary measures, governments globally have kicked into action to roll out fiscal stimulus packages, many of which had never seen before skills. A historic 2 trillion stimulus deals were just cleared in the US yesterday. And earlier today, Singapore just unveiled an unprecedented plan worth 48 billion to combat fallout. And along with our Singapore's previous measures, the total sticker price of Singapore's fiscal boost now stands at 55 billion, which is about 11% of our GDP.

So, just to summarise, governments around the world taking whatever it takes to hold nothing back hammer approach to preventing an economic collapse. And we expect the coordinated chorus of supporting the economy at all costs from governments worldwide, besides the lower for much, much longer interest rates scenario, and the massive creation of new liquidity to combine to create a cocktail that will see the investment market diverged and run far ahead of the actual recovery of the real economy going forward.

So just to put things in perspective, this graph shows the US GDP at constant prices superimposed on US commercial property prices. Now in the last downturn, the real economy shrank over a one-year period. While US commercial property prices were in a downward spiral for two years before we went on a very strong Bull Run, where they more than doubled our value since 2009.

So taking into consideration the discussion earlier, we expect the real estate down cycle this time round to be much shorter. And already some institutional investors have lined themselves up to take advantage of current market dislocations and opportunities. Carlyle has moved swiftly forward to put together a massive $2.3 billion Japan fund just to chase opportunities. The Japanese pension fund POBA has committed a hundred and 20 million to build and to rent single-family housing strategies in the US.

19:01
Keith

All right, thanks to Mark for the update. All right, now we go on to the last segment of today's presentation, our risk outlook and investment strategies. But before we start this segment, I just like to say that I really have little data to work on. This is really drawing on experiences and how we see things panning out. Right. Okay, first off the billion-dollar question, will there be a global recession?

I think this question has probably already been answered by many folks. I've highlighted a few of them right here. The IMF (International Monetary Fund) said that's a major financial crisis. Morgan Stanley says that the base case is a global recession. Right. And the OECD (Organisation for Economic Co-operation and Development) chief just yesterday said economic hit will be felt for a long time to come.

Right. So given what we see right here, the answer is most probably, there'll be a global recession, right? So what does it mean to us? Right, and what does it mean to all of us? Now, first thing, the economic impact will suddenly be significant without a doubt. That's how we feel there will be major slowdowns in businesses in the trade. And obviously the economies are going to recession right.

Now, how does this filter down to the real estate market? When economic activities slow? The effect on real estate takes a while before you feel it. Right. But the severity on each market really depends on how well each government deals with it. Mark mentioned earlier in the slides, many governments have taken a powerful approach. Singapore, for example, came up with a $55 billion budget package to help the economy so it really depends on each market.

Now without a doubt, real estate market demand, real estate demand will slow. And what does that mean? Vacancies will rise, and rents will start to contract. When these two things happen, obviously capital values will start to fall without doubt, right? And what will happen to the investment climate? First, transaction volumes will slow significantly. Why? buyers and sellers will start to step back and take stock.

In terms of bias, you'll start to re-examine the underwriting assumptions. Is it the right time to go in? Or those that they've already been negotiating, probably it's time to reprice existing deals. Right? For the sellers, the sellers are the ones that are really difficult. What is the exit strategy at this point in time? Do they hold on to the assets? Or do they cut losses and sell now? Right? These are really hard questions.

So that there'll be a flux where a situation where there are no transaction volumes will slow to a grind because buyers and sellers will wait and see how the dust will settle. Now, without a doubt, we are very sure that yields capital values will be rebased. What we mean to rebase quite simply, they will start to come off, right as we see from the last cycle and what happened just last month, there were record levels achieved in key cities.

Sydney, for example, CBD office buildings were transacting close to 25,000 per square meter. Singapore offices were transacting to 3,000 per square foot. Without a doubt, we are sure that the capital values will start to come off right now. So with all this in mind, how do we approach the markets? I'll let Mark now talk about the approach.

23:00
Mark

So our go-to strategy going forward is we will target core and core-plus strategies. This means that we will target assets in very prime locations, and also more importantly underwritten by very strong tenancy covenants. And we note that early on, all the government's are coming through very strong stimulus packages. But we think it's going to take quite a while before these. The impact actually filters through to the real economy. So the strategy here is to bank on very highly visible income streams in the near term, such that by the time we exit or dispose of, we'll be catching the market in a very strong recovery phase.

Internally, what we'll be doing is, we are tightening up our underwriting standards. We will be stress-testing a lot of our scenarios to ensure that we check out in the event that the economy turns for the worst. In terms of the use of leverage is a double-edged sword, we will ensure that the deals will have solid interest coverage ratios. And also we will be very careful with our growth assumptions and cap yields.

Now, in terms of the sectors wise, it is no longer easy for us to say we are bullish on one particular sector because going forward, I think the team we will focus on is segmentation. So, even within the Office sector itself, we expect to see a flight to quality trend playing out over the next two years at least whereby vacancy rates are expected to go up in the key markets as some smaller businesses cannot continue. And in place of that, rents will be coming down and we expect most of the tenants to then gravitate towards the better-located locations.

So, our prime targets will then be the key cities like London, Sydney and Melbourne. And we'll be a lot more cautious approaching more peripheral commercial locations.

Now for the retail sector, we will also be very sensitive to the segment that we'll be targeting. As it is even before the virus hit, the structural trend was towards non-discretionary retail and away from the discretionary segment. And if anything and all we think that this virus episode has sort of underlying or accelerated a trend and given that we think the economy will take quite a while to recover that we'll be focusing our efforts on retail that caters pretty much to the essentials. On a very opportunistic basis, we'll also be looking at the prime retail streets, for example, that where we expect very attractive pricing to emerge in the near future,

26:24
Keith

In terms of the Industrial sector bullish on this sector, on a few fronts, obviously, with the recent virus, it has increased the e-commerce demand. So, in this sector, we're focusing largely on the last-mile distribution, and we expect that to hold constant or even increase. Now, there's some weakening in this sector, we expect that to be the large distribution centres this weakening of demand might increase some vacancies due largely to suspension of productions or disruption in supply chains to some extent exacerbated by the trade wars between China and US right.

So, how do we approach this segment, we continue to seek strong logistic properties with the last mile distribution characteristics? E-commerce retailers are some segments that we can target hard and we expect some downward pressures on industrial demand. Hence, we are a bit more selective in large distribution centres. The primary markets are the US, UK and Australia continue to be our key markets to target right.

Now on the Residential sector, the conditions are really transforming and this is a sector that is very cautious largely because of the uncertainty in the economic environment which will, without doubt, affect unemployment.

So as you have read, we expect unemployment figures to creep up. The US itself expected 10% in unemployment and 20% expected in Australia. However, there's a silver lining we know that interest rates have been cut to some extent. This will help to cushion mortgage defaults. Now, how do we approach this segment? Really, at this stage we have a hold and wait for an attitude to greater clarity, its greater clarity emerges in terms of how the economy will pan out. We are obviously selectively looking at very prime residential assets. But this must offer a strong discount to historical values.

All right now, just to conclude the viewpoints we've just shared. First, definitely the recession given the huge amount of a similar package that we have seen, we think the recession is likely to be short-lived. In the last global financial crisis, the US dished out 780 billion of stimulus packages, but now they dished out 1.8 trillion. We think the recession will be short-lived.

However, the impact on the economy and the growth of the economy will take some years before it comes back up. Well, how would this impact real estate? Without a doubt, we are sure that there'll be a negative impact on real estate markets. How pronounced it may be, depends on each market. And it really depends on how well the government contains the virus and stimulates the economy.

What it means for us is we think there is buying opportunities and assets itself, asset prices will be rebased without a doubt, and that means it's a good time to look at investments to buy, right? But as a start, as it stands right now, we're still early days on the economic impact.

Hence, we will go defensive, we look at the core and prime assets, selectively if there's a sound value proposition in terms of value-add opportunities, certainly is something that we look out for. But we will not play in this sector or in this segment until we are pretty certain how the economic conditions are. Now, we do look at alternative asset classes that are well aligned with the trends that this is happening in, for example, data centre senior living in healthcare, but the end of it all.

Are we able to catch the lowest point of the market? The answer is no, we can't. Right? It really depends. At what point you catch it. So we urge our investor’s real estate investing to always take a mid to long-term investment horizon, you need to look at it from three years to five- or five-year horizons.

But this time of the market where we see right now, we think there are definitely buying opportunities, and they will emerge. Given the weakness of the economy, prices will start coming off. But you need to stay the course. Either three years or five years. That's how we look at it. All right.

All right. Thanks so much, everyone for taking your time. We now move on to the Q&A segment. So please feel free to post your questions and Mark and I will do our best to try to answer them. All right. Thank you.

Transcribed by https://otter.ai

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