kopi-C with ESR-LOGOS REIT CEO: “Logistics assets are not an alternative asset class”

In managing real estate, it’s all about the ability to anticipate evolving trends and needs of the tenants in their space requirements in order to reconstruct your properties to remain relevant. When it comes to REITs, there is an additional and increasingly important element to consider – the state of financial or capital markets.

From an asset level perspective, having to navigate an intricate ecosystem of stakeholders (tenants, regulators and service providers etc.), anticipating where might be the next emerging need and even identifying “sunset industries”, to taking into considerations the state of the financial markets to weigh out and make the most appropriate decisions — it’s something that continues to fascinate and keeps it going for Adrian Chui, CEO & Executive Director of ESR-LOGOS Funds Management (S) Limited, the manager of ESR-LOGOS REIT (“E-LOG”), to this day.

As such, qualities like trust, respect and being open to views and criticisms within the E-LOG team are crucial. Armed with the belief that “no one knows everything”, it is the collective views and feedback from Chui’s deal team members that allows them to make better-informed, and sometimes unpopular, decisions, he explains. 

Says Chui, “What inspires me is to see a deal through to fruition, and have each member know that they are and have contributed to the ecosystem, gained new expertise and knowledge from their peers.”

Chui’s motivation stems from his constant vigilance in anticipating trends and identifying opportunities. He also places great emphasis on working collaboratively to plan, negotiate and execute potential deals and transactions that enable E-LOG to achieve sustainable growth in the mid to long term while achieving the right risk-return metric, rather than solely prioritising on short-term gains.

“Managing uncertainties and accepting the right level of risks for the return required is always the hardest. With REITs, availability and certainty of funding are of utmost importance because fundamentally, REITs do not retain any cash – we pay out everything as dividends – so, the conditions or state of the financial markets can make or break a REIT if execution strategies are not carefully planned or evaluated”, says Chui.

Identifying potential areas of growth

For Chui, a lot of this experience comes from having chalked up decades of experience in real estate investment, fundraising, funds management and roles in the investment banking industry.

Since 2000, Chui has had a front-row seat to witnessing the real estate market and REIT cycles in Asia. In his view, there were three “paradigm-shifting events” in the last 20 years which have shaped Asia’s real estate market as we know it today.

One key event was China’s property market emerging as a core real estate market and making its mark on international investors — “inevitable” given its mammoth population and economic size.  

Secondly, the development and growth of the S-REIT market, which plays to Singapore’s strengths as a global city with rule of law and a business-friendly environment. What came as a surprise, however, was the pace of growth in both depth and breadth, especially when one considers the size of the Singapore real estate market relative to its regional peers. Basically, REITs have put the financial markets element into the real estate game and turbo-charged its growth by availing what used to be an illiquid asset class into the hands of many, observes Chui. 

In the third and most recent event, the growth of e-commerce and the Covid-19 pandemic’s impact on secular trends which has fundamentally transformed the way in how we produce, deliver and consume goods and services in our daily lives. 

This will have a profound impact on how logistics assets — which were once viewed as an “alternative” or even visually unappealing investment class as compared to swanky offices, retail malls and hotels — are today viewed as a sustainable asset class for investors, he said.

As a result of these secular trends, logistics have become the backbone of the economy due to its importance to economic supply chains. Hence, the outlook for the logistics sector remains robust as more occupiers and industrialists build up inventories of just-in-case storage to manage unforeseeable supply chain disruptions. Within the logistics sector, new trends and segments have emerged that challenge landlords to recalibrate their portfolio mix to capture these emerging opportunities e.g., cold-stores and pharmaceutical logistics.

This continues to underpin the higher demand for industrial and logistics space, says Chui. 
Under Chui’s leadership, the team has already carved out a stake in this area. 

As at 31 December 2022, E-LOG has assets under management of S$5.7 billion in a portfolio of 82 assets in Singapore, Australia and Japan, with Logistics assets making up over 51% of our portfolio value and High-Specs assets at c.12% (collectively known as “New Economy Assets”).

As a testament to the quality and focus on New Economy Assets, the REIT reported positive rental reversion of 11.8% for its overall portfolio in FY2022 with both the Logistics and High-Specs segment driving the positive rental reversions at 15.7% and 12.3% respectively.

Going forward, despite the slowdown in the global economy, it foresees “sustained growth” in the logistics segment primarily due to favourable demand-supply dynamics and continued change in secular trends. In fact, E-LOG’s portfolio will be more pivoted towards these New Economy Assets with logistics driving this pivot, says Chui.

Expanding Overseas

Beyond having the foresight to see the potential of the logistics sector, Chui has been taking strategic steps to geographically diversify the company portfolio and bolster the REIT’s financial performance.

The main bugbear for Singapore’s industrial sector is that land leases are very short with a maximum of 30 years, says Chui.

This short land tenure results in a rapid land lease decay which affects the net asset value of the REIT. In addition, the short runway does not allow the REIT to meaningfully redevelop or enhance the asset to meet the required returns. Hence, addressing this is important, else the land lease decay problem will erode the REIT’s underlying value.

For this, they decided to look outwards and channel their efforts into overseas acquisitions. 

As of FY2022, approximately 20% of the REIT’s assets by AUM are in Australia, and in October 2022, E-LOG completed its acquisition of ESR Sakura Distribution Centre in Tokyo, which marks its maiden foray into the Japanese market. The properties in Australia and Japan are either freehold or are on land leases longer than 30 years, lengthening the lease expiry profile of the portfolio. 

In evaluating overseas acquisitions, Chui has laid out “fundamental criteria” — there must be rule of law, and funds must be able to flow freely in and out of the country to facilitate the payment of dividends. In addition, there should be good access to local currency funding, allowing capital and income FX risks to be managed. Finally, the market must be scalable, allowing the REIT to acquire and grow in a meaningful way. 

These are markets where its sponsor, ESR Group, already has a footprint, with links to its trusted local colleagues to manage the assets efficiently.  

Having a strong team of professionals with a proven track record of value creation across the various real estate practices – from finance to asset management to investment management, has helped keep the REIT competitive, says Chui. 

“4R” Growth Strategy

To keep thriving, E-LOG embarked and successfully executed a 4R strategy: Rejuvenate, Recycle, Recapitalise, and Reinforce, for its key portfolio strategies.

First, through “Portfolio Rejuvenation”, says Chui.

The rejuvenation strategy covers three main areas, namely (1) Acquisitions of quality value-accretive assets; (2) Redevelopment of older-specs assets into modern and future-ready properties; and (3) Asset Enhancement Initiatives (“AEI”) to repurpose and rejuvenate dated assets to suit the demands of the New Economy.

Acquisition of new assets involves a rigorous investment evaluation process to discover assets in high-growth industries, overseas sectors, or assets with long lease terms which are aligned with their strategy. The focus here will be on Logistics assets.

Through a periodic monitoring and assessment process, it will also identify mature assets in need of refurbishment or redevelopment to attract tenants, said Chui. For example, it will look to enhance and reposition a general industrial property to a high-spec property or redevelop a conventional warehouse into a cold-store facility. This will in turn attract higher rent-paying tenants, which in turn provides rental and valuation uplift. 

Another approach is to develop unutilised plot ratio to “future ready” its properties and engage tenants in trending industries with long tailwinds. 

The second portfolio initiative is “Recycling” capital through divestments of non-core assets. 

By divesting non-core assets — typically smaller-sized and with short land leases — the REIT is able “recalibrate” its portfolio, said Chui. Hence, the proceeds from the divestments can be used to pare down debt or be redeployed to the acquisitions of higher-quality assets. 

Next, by “Recapitalising” our balance sheet for future growth, says Chui.

As part of our proactive approach to capital management, we have maintained a well spread-out and staggered debt maturity profile. With a good level of financial flexibility to fund our growth aspirations with adequate debt headroom, we will also continue to focus on strengthening our financial position over the long-term, says Chui.

Last, “Reinforcing” sponsor support for quality growth.

E-LOG will continue to rejuvenate its portfolio by leveraging on ESR Group’s network, footprint and local expertise with a focus on New Economy assets.

To realise this, the firm can leverage its sponsor’s portfolio of over US$68 billion in assets in New Economy assets, with US$2 billion of visible and executable pipeline for E-LOG. “This is a key differentiator for E-LOG in an increasingly scarce environment for logistics assets,” says Chui.

Learning Not to Give Up 

Outside of work, Chui, 47, is a father of three children, aged 12, 10 and 6.

In his downtime, he keeps active by playing squash and enjoys sampling different types of cuisine and exotic foods with his family. Whether it is a simple bowl of bak chor mee at the hawker centre or a street stall in Bangkok, the adventurous foodie is comfortable with all types of food and their settings. 

Drawing the parallels to the professional setting, Chui says, “This is a philosophy which I try to apply at work too. Whilst optics are nice to have, it is the quality of work which matters. Just like opinions on food tastes, not everyone will agree that the food deserves a Michelin Star, while some others may think it deserves two stars. We must accept the criticisms just as much as the accolades that comes with it. We have received feedback on our 4R strategy – some say it creates too many uncertainties (“doing too many things too quickly”) while others want us to speed things up (“get that first mover advantage”). Fundamentally, we need to ensure that the right risk-return metric is achieved and our assets remain relevant to tenants’ space needs in order to ensure the REIT is run sustainably and not go for short term gains.”

Asked what lessons he would share with his staff and children, Chui dishes out one key piece of advice — to never give up.

“We all go through highs and lows in life just like property cycles. What matters most is how we make the most of it. Every time we come away from a difficult situation, we need to learn from it, not repeat mistakes and use that experience to anticipate or manage the situation the next time we are faced with a similar situation,” says Chui.

About ESR-LOGOS REIT

Listed on the Singapore Exchange Securities Trading Limited since 25 July 2006, ESR-LOGOS REIT invests in quality income-producing industrial properties in key gateway markets. As at 31 December 2022, ESR-LOGOS REIT holds interests in a diversified portfolio of logistics properties, high-specifications industrial properties, business parks and general industrial properties with total assets of approximately S$5.7 billion. Its portfolio comprises 82 properties (excluding 48 Pandan Road held through a joint venture) located across the developed markets of Singapore (61 assets), Australia (20 assets) and Japan (1 asset), with a total gross floor area of approximately 2.3 million sqm, as well as investments in three property funds in Australia. 

The company's website is https://www.esr-logosreit.com.sg/

About kopi-C: the Company brew

kopi-C is a regular column by SGX Research in collaboration with Beansprout, a MAS-licensed investment advisory platform, that features C-level executives of leading companies listed on SGX. These interviews are profiles of senior management aimed at helping investors better understand the individuals who run these corporations.

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