APAC RE: Unlocking opportunities – Institutional

Private Markets

Investing in the Asia Pacific (APAC) region offers growth opportunities in stable markets like Australia, Japan, Singapore, and New Zealand. Investors can capitalize on market repricing and diversification and strong fundamentals, whilst minimizing emerging market risks to generate strong performance.

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A new regime

01

Growth without added risk

By allocating capital to APAC’s most transparent, liquid markets such as Australia, Japan, Singapore, and New Zealand, investors can benefit from the region's growing prosperity without taking the emerging market risk.
02

Diversification benefits

Cities in APAC with favourable supply-demand dynamics offer investors the opportunity to capitalise on diversification benefits through low return correlations with other world cities.
03

Capturing the APAC lag.

Winning strategies in the US and Western Europe, such as life sciences, are often nascent in the APAC. To implement this strategy and gain first mover advantage, local knowledge allied with a global footprint is critical.

00;00;06;19 - 00;00;31;22

Jenny Delaney

Hello, and welcome to today's discussion about the Global real estate market. I'm Jenny Delaney, and I can't think of anyone better to have this conversation with than our very own Hamish MacDonald, who leads real estate investments for us in Sydney. And we are really fortunate that he's here with us in the studio in New York today.

00;00;31;25 - 00;00;38;21

Jenny Delaney

Welcome, Hamish, and thank you.

Hamish MacDonald

Thank you Jenny, very, very happy and excited to be here. Thanks for having me.

00;00;38;21 - 00;01;01;12

Jenny Delaney

So Hamish if there's just one thing you'd like people to take away from today's conversation. What is that?

Hamish MacDonald

I think it's it's time to look at Asia-Pacific real estate again. And or if you haven't done it before, it's time to have a look. We have the best risk adjusted returns globally. Cyclically. It's the right time to be deploying.

Source: Statement refers to APAC region. MSCI Annual Property Values (Unfrozen; Weighting: Market size) published annually (standing investments), standard deviation as a proxy for volatility, 15-year returns, 12/31/2023. Jones Lang LaSalle, 1/13/2025. Reliance upon information in this material is at the sole discretion of the reader.

00;01;01;17 - 00;01;08;13

Hamish MacDonald

Plus, we have sectors that you can almost look into the future when you think about the APAC convergence.

00;01;08;13 - 00;01;13;14

Jenny Delaney

So, Hamish, let's talk about what sectors are you finding the best opportunities in right now?

00;01;13;19 - 00;01;19;16

Hamish MacDonald

you'll see that many of the sectors that we're focused on actually have really nice clean cash flows.

00;01;19;18 - 00;01;34;07

Hamish MacDonald

Often inflation linked, often, backed by government tenants, or cash flows or subsidies and and and often in high demand, low supply locations for growth.

00;01;34;11 - 00;01;46;03

Hamish MacDonald

have to focus on the sectors the global capital wants to be in because that's our exit. So we are focused on the living sector, on last mile logistics and on alternatives

00;01;46;03 - 00;01;56;05

Hamish MacDonald

We like sectors where the thematic has played out in the US, and there's a convergence on to that thematic that's been in place and successful.

00;01;56;05 - 00;02;01;03

Jenny Delaney

Talk to us a little bit more about the Asia convergence. Like what does that really mean?

00;02;01;15 - 00;02;08;19

Hamish MacDonald

when we look at strategies that have been highly successful in the US, why haven't they been highly successful in a market like Australia?

Hamish MacDonald

00;02;08;26 - 00;02;28;13

Hamish MacDonald

Very, very similar supply demand dynamics. So why oftentimes the sectors there it exists but it's misunderstood or misinterpreted. So we can actually dig into that a little bit further. And we've got a great track record of being an early mover into those sectors so that we can ride that strategic wave upwards.

00;02;28;13 - 00;02;55;07

Jenny Delaney

So using the insights from being part of Blackrock to spot trends that have already happened elsewhere, have conviction in them and be able to move capital quickly to be able to capture them in other markets.

Hamish MacDonald

Yeah, correct. Knowing where to look, having conviction and then moving quickly. And you know, when you have that you are a first mover and you'll be able to take advantage of those trends.

00;02;55;07 - 00;03;04;19

Hamish MacDonald

We're seeing this happen often. We're seeing, thematics and strategies that are playing out in the US, and they've been very successful over long periods of time.

00;03;04;25 - 00;03;26;15

Hamish MacDonald

And then we look at some markets like Australia and we wonder why they haven't played out. A key example is in last mile logistics. So in 2020 we started looking at the Australian market. The dynamics of Sydney and Melbourne geographically meant that it should be a market where last mile logistics works, right. But it wasn't for some reason there was no research about it.

00;03;26;15 - 00;03;56;08

Hamish MacDonald

No one was buying. We couldn't say it. And then and through our BlackRock lens and talking with our team in the US, talking with our team in London, we knew what to look for. There were these inner urban markets that had these wonderful supply demand dynamics, huge amount of demand, very limited supply. And so we went about, finding these sectors, all these markets in Australia, in Sydney and Melbourne, and we've now built Australia's largest dedicated last mile logistics platform.

Source: BlackRock, Based on valuations plus as-if complete values for approved development pipeline 12/31/2024.

00;03;56;10 - 00;04;23;23

Hamish MacDonald

It's called Urban Logistics Co. And that really gives us this amazing data advantage now because we own these sites in the best neighborhoods in Sydney and Melbourne, we know what the rents are doing, we know what the tenants are doing, etc. and we've

So really getting an edge from seeing how a trend has played out in another market globally and being early to seeing that play out in your region.

00;04;23;23 - 00;05;03;08

Jenny Delaney

So last mile logistics is one example. Are you seeing any others?

Hamish MacDonald

There's a new and very exciting one that we're focused on. So life sciences, real estate in the US has been a pretty hot topic for 10 to 15 years. And very successful. In fact, it's gone through a cycle. The same had been happening a little bit later in the UK, and so we, we deep dived into both of those markets and again, for an industry in Australia that's really focused on by the Australian federal government and by the top pharmaceuticals and the universities, where are all the labs?

00;05;03;10 - 00;05;43;03

Hamish MacDonald

And, and so we studied this sector for about five years in Australia, and we discovered that those labs absolutely exist. They're sitting on university campuses. They're owned by the federal government, but they're also sitting in listed rates, unlisted rates in the most unlikely of places. And these are beautiful purpose built laboratory buildings with great tenants. And, and so it really feels like we are in the first inning, to use, a baseball terminology, whereby these assets are there, we can buy them really, really, well, deeply below replacement cost.

00;05;43;03 - 00;06;10;17

Hamish MacDonald

In fact, we bought some at the end of last year at a 60% discount to replacement cost. And with those assets we really think we're taking core risk, but we're generating value add to opportunistic returns. By actually recalibrating the rents on these buildings, which is something that needs to happen. And so we have a very, very deep pipeline in that sector to build out a very large scale aggregation strategy there.

00;06;10;17 - 00;06;24;16

Jenny Delaney

It sounds really multi-faceted in terms of different drivers in the different markets that you described as an investor, like, what does it take to be successful investing across all those markets?

00;06;24;28 - 00;06;32;29

Hamish MacDonald

Best risk adjusted returns by far are in these developed markets of Australia, Japan, Singapore and New Zealand.

Source: MSCI Annual Property Values (Unfrozen; Weighting: Market size) published annually (standing investments), standard deviation as a proxy for volatility, 15-year returns, 12/31/2023. Jones Lang LaSalle, 1/13/2025. Reliance upon information in this material is at the sole discretion of the reader.

00;06;32;29 - 00;06;47;24

Hamish MacDonald

You have got, deep liquidity in various asset classes, and you have got generally, political stability and and all of those things tick boxes for us as being the first places we should be deploying capital into.

00;06;47;26 - 00;07;26;25

Hamish MacDonald

You have to have the best teams on the ground in those markets. They have to be led by, deal leads that have been in those markets for a long time. They have to be very deeply connected. We do 85% of our deals off market. And that's proprietary deals one on one negotiate through doing that. We've seen the benefits we actually have, we've seen a very large increase at double digit increase between our purchase price and our first independent valuation, which says to me that not only are our guys doing great deals off market, but they're buying, well, buying super cheap.

Source: Data is from the predecessor fund BlackRock Asia Property Fund V, 3/31/24.

00;07;26;27 - 00;07;47;28

Hamish MacDonald

And so if you've got the right people on the ground, that can be the case.

Jenny Delaney

As always, it comes back to the people and, talent in terms of investment performance. Yeah. I wanted to come back to this point around value add. Value creation is something you hear a lot about in private equity and other alternative asset classes.

00;07;48;03 - 00;08;17;14

Jenny Delaney

How are you adding value to the investments that you're making?

Hamish MacDonald

So same applies for us. We have dedicated people in each of our teams, in the countries that are specialists at what they do. They're specialists at leasing, managing developments, managing specialist partners. And through that, they create intrinsic value. We're always looking to improve the net operating income, the bottom line.

00;08;17;16 - 00;08;41;26

Hamish MacDonald

And and that over time will obviously serve our purpose. Well, we have several examples. We have an example in Singapore where we took a extended stay hotel and it had about 50 rooms, and our asset management team looked at it. They combined, two larger rooms, put them together to make three rooms, and we ended up with, 170 rooms rather than 150 rooms.

00;08;42;02 - 00;08;51;24

Hamish MacDonald

And our forecast know I jumped up over 10% because of that. So, it's through active management where we can see even stronger performance

00;08;51;24 - 00;09;13;01

Jenny Delaney

So it sounds like one element is identifying the strategy you want to get exposure to. And it sounds like it's not straightforward in many cases to actually get access to those property types. So how do you think about that.

Hamish MacDonald

So I think it it is unique. It does come with a lot of hard work over a long period of time.

00;09;13;01 - 00;09;45;27

Hamish MacDonald

We're very, very fortunate that we've been diving into that sector for a long period of time. And in fact, we've recently set up an operating platform, the first of its kind in Australia called area 53, which is a specialist manager of life sciences real estate. So I think if you are going to, move into these first mover, strategies, you need to make sure you are doing it with the right platform, the right operating partnerships, and be best in class.

00;09;46;00 - 00;09;49;01

Hamish MacDonald

Otherwise you're not guaranteed success.

00;09;49;01 - 00;10;01;00

Jenny Delaney

It sounds very dynamic and real advantage to being nimble. I want to pull on one thing you talked about there, which is always having an eye on the exit and who you're selling to.

00;10;01;06 - 00;10;26;08

Jenny Delaney

How does that permeate through everything that you're doing?

Hamish MacDonald

It's it's the number one thing that we do. I would say, that has to be the focus. We typically invest in 3 to 5 year business plans. And so having that exit front of mind really, really gives us the confidence that the sector that we're deploying into is going to have a successful exit pathway.

00;10;26;10 - 00;10;46;19

Hamish MacDonald

We don't, hope that there will be more liquidity in the future. We think that that's a difficult strategy. It's something outside of our control. We tend to only focus on the things inside our control.

Jenny Delaney

So it's really thinking about when you're buying who ultimately you're going to be selling the asset.

Hamish MacDonald

Absolutely. Yeah. First and foremost, who are we going to be selling it to.

00;10;46;19 - 00;10;51;28

Hamish MacDonald

Are they the cheapest form of capital globally because that will give us the best exit path.

00;10;51;28 - 00;11;01;10

Jenny Delaney

Let's talk a little bit about you, Hamish, as an investor, like what is it about real estate that really inspired you from the very beginning?

00;11;01;13 - 00;11;24;00

Hamish MacDonald

So I've been doing this for over 25 years. One of my first jobs was on the Sydney Olympic Village building houses and apartments, which was very exciting. And, and then I spent ten years in London, and I think having that global perspective and then moving back into the Asia-Pacific region was, was very, very helpful to my career.

00;11;24;00 - 00;11;47;28

Jenny Delaney

Well, Hamish thank you. This has been really great conversation with you today. Thank you for being here with us in person. If you enjoyed today's conversation and you want to learn more, you can reach out to me, Jennifer delaney@blackrock.com or your sales representative again, Hamish, thank you.

Hamish MacDonald

Thanks, Jenny. That was really fun.

Why Asia Pacific?

The Asia Pacific (APAC) region today offers investors a compelling opportunity to benefit from its strong economic momentum, increasing global influence, demographic advantages and idiosyncratic country level characteristics. There has been a rebalancing of the global economy over recent decades, whereby the APAC region plays a critical role in the global growth story, accounting for over 52% of global GDP growth in the decade to 2023.

Investing in APAC does not equate to increasing risk-taking. By focusing on the most transparent and liquid countries, strong risk adjusted performance can be delivered. Australia, Japan, Singapore and New Zealand are countries where these opportunities can be accessed. Without investing directly into the large (and riskier) engines of growth that are India and China, real estate investors can allocate into the less-volatile markets which benefit from ‘being on the doorstep’ of these economies. Given the pro-cyclicity of real estate, investing in regions predicted to show robust growth contributes to long-term resilience.

Benefitting from diversity. The APAC region is more heterogenous than markets in the US or Europe. Investors can diversify away single drivers of risk by exposing to a range of macroeconomic environments and demographic profiles. Global investors can further diversify specific market risk by including an allocation to APAC in their portfolio construction.

Unlocking Value Add

In APAC, investor preference has shifted towards value-add strategies. Recent surveys show it is now the preferred investment style for 63% of investors in 2024, up from just 33% last year. Value add is a compelling strategy at this stage in the cycle given the ability to deliver both income and capital gains within an acceptable level of risk. Investors have the opportunity today to benefit from the cyclical upside whilst aligning their strategy to structural trends that will drive strong future performance.

The repricing we have observed today has created one of the most attractive buying opportunities since the GFC. The post-COVID era and the subsequent inflation spike is characterized by uncertainty in the wake of elevated debt costs, limited price transparency and illiquidity across the globe. Repricing creates a compelling entry point for the skilled investor as refinancing pressures increase distress driven opportunities with fewer competitors in the current market. Repricing is not consistent across the region with some sectors/markets experiencing much more significant value declines. For example, markets such as Japan are not expected to reprice significantly, however cyclical markets namely Australia and New Zealand are repricing just as much or more than other global markets.

Unlike other cyclical downturns, fundamentals in APAC have remained robust. Real estate returns in APAC sat at 4% last year whereas returns remained negative in both Europe (- 3.1%) and the US (-7.3%). This can be attributed to the strong fundamentals and the different cycles playing out across the region. For example, Japan’s accommodative monetary environment creates a distinctly different environment for real estate investors today. A value correction combined with a healthy occupier market supports our view that today marks an attractive cyclical opportunity for market entry.

The repricing in Sydney logistics has been as significant as that observed In London and more significant than markets such as LA and Paris, highlighted by record low vacancy rates.

Benefiting from the APAC lag. Emerging sectors in western markets that have evolved into mature investment sectors over the past cycle, are yet to fully play out in APAC. Informed investors can build strategic conviction around such sectors, benefiting from early-mover advantage.

For example, investor allocations to life sciences have grown significantly in both the UK and US in recent years. European Investor intention surveys showing that one third of investors are pursuing alternatives are focused on life sciences. As the sector has matured life science rents have settled at circa 40% premium to A-Grade office. These levels are justified by the supply demand imbalance.