Stay disciplined, be more aggressive in 2023: PGIM Real Estate CEO

Investors often lose deals as they are too cautious or wait too long for values to go up to the exact point they expect. However, being too precise is not a case for PGIM Real Estate Inc., the global asset management unit of Prudential Financial Inc.

Investment managers can be more aggressive in 2023 if they have capital and get a right timing and strategy, PGIM Real Estate President and CEO Eric Adler said. As equity will see more pain this year, investors may want to bet on more debts, as well as real estate investment trusts (REITs) which have discounts on underlying assets, he said.

PGIM Real Estate is managing $206.8 billion in assets. The global leading real estate firm has invested $2.8 billion via 14 deals in South Korea since 2003. Despite high level of leverages, Korea is a very dynamic market with fast recovery and powerful dealmakers, the president added.

The following is Adler’s interview with The Korea Economic Daily in December of 2022. The president visited Korea to set up deal strategies and discuss investment opportunities with the country’s major institutional investors.

▲ PGIM Real Estate has invested in the South Korean market for more than 18 years. What are your thoughts on the characteristics, pros and cons of the market? 

"Korea is a relatively medium-sized country, but it is a very dynamic market with a lot of world-class companies and global investment leaders. Also, there is a highly educated workforce and relative transparency. 

There are lots of dealmakers in the Korean real estate market -- it is good in some ways but also a challenge. The market is very competitive so you have to move quickly to get the opportunity. Another challenge is that the Korean market uses quite a bit of leverage, which makes real estate risky.

But in terms of contribution to the ultimate performance of our Asia strategies, we expect a lot of alpha to come out of Korea."

▲ What are the successful cases that PGIM Real Estate has made in Korea?

"Among many successful deals are office buildings in Seoul. We acquired the Jung-An Building for our Asia value-add strategy in December 2019, in partnership with Samsung SRA Asset Management and Samsung Life Insurance. We fully modernized the 10-story building, significantly enhanced its value and exited in 2021. 

Another case is T Tower in the central business district (CBD) of Seoul. We bought the property in 2017 and exited in two years. I remember that it wasn’t the perfect bottom of the cycle when we acquired T Tower; but we liked the features of the building (PGIM Real Estate didn’t disclose the deal sizes due to its compliance policy). We have made all these transactions possible as we stayed nimble while competing with local rivals."

▲ What was PGIM Real Estate’s strategy for global real estate amid interest rate hikes, inflation and rising costs in 2022?

"We started selling off assets more fragile in a downturn, slowly bringing down the leverage levels and creating more liquidity within our portfolios. On the other hand, we started overweighting transactions on asset classes that would perform well in downturns, specifically multi-family, residential and industrial real estate. We have been doing less office since 2016.

In retail, we focused on anchor retail such as grocery. Shopping malls are still strong in Singapore despite more volatility, so we also invested in a few shopping malls.

By region, we have had few transactions in Europe since the Russia-Ukraine war. In the first half of 2022, we did more debt, particularly higher-yielding debt, and equity as they were very strong during the period. In the second half of the year, transaction volumes started to slow down.

In the US, transactions have been much slower. Values will start to drop from the end of 2022 through 2023.

Asia was quite strong in 2022 as it hasn't been much impacted by the Russia-Ukraine war. We closed many acquisition deals in the region although we have become a little more cautious.

We were very active in buying for the first half of 2022 in Australia. In Australia, the interest rates started rising very fast and I think pricing there has already started to correct."

▲ Real estate is regarded as a stable asset class of alternative investment portfolios. Do you think this will stay true in 2023 as well? 

"Real estate assets could be either stable or risky. If you put no leverage, have an unlimited time horizon and pick strong locations and robust assets in the right regions, that is a fairly low-risk strategy.

On the other hand, real estate is volatile and not safe if you put a lot of leverage. Also, you have to exit before a certain time – that is why we like the asset class and try to find opportunities." 

▲ What are your views on each region given the current macroeconomic risks and market uncertainties? 

"The US will probably rebound quickly compared with Europe, which is highly dependent on foreign energy sources. We also think the UK will rebound this year after moving out of this downturn.

Australia is fundamentally strong despite interest rate hikes and high inflation. The economy seems to start slowing down, but we think that rents will fairly quickly increase as wages go up.

We also like Japan. Inflations will probably get a go-up but not to a point where you lose the positive effect of leverage. Korea will suffer for a while, but as it has in the past, the crisis won’t last long.

The themes we focus on are data centers, everything about digitalization and the cloud. Also, residential is going to stay strong due to a lack of supply. Senior housing has been undervalued amid the pandemic but it will come back." 

▲ You said it is the time to focus more on debt while being more cautious with equity. What is your advice to real estate debt investors?

"When you begin to invest, you have to be nearer to the bottom of the cycle. 
It is pointless to time the exact bottom. You should have a long-term belief of where sustainable values will rebound once we go through this tough period.

As long as you have chosen asset classes and locations, the values will be low enough in the second half of 2023 or the first half of 2024. Even if the values get a little worse in the end, I think you will be fine. 

Also, I would invest in public real estate investment trusts (REITs) if I had capital now. They have anticipated a downturn and discounts to underlying assets. Some of the REITs are massive for certain sectors which should be fine in the long run. Some of our clients are also looking at REITs as the right way to invest now.

I think this year would be more interesting for debt strategies. Interest rates are getting to a point where we can create a very attractive income for our clients by being lenders. I think that's going to be Australia and hopefully Korea in 2023."

▲ How is PGIM Real Estate different from other investment firms and what is its unique competitive edge?

"Firstly, we are one of very few players that have the breadth of capabilities and global reach. We do every asset class, such as debt, equity and public and private real estate with the entire risk spectrum. 

Secondly, we have managed third-party money for over 50 years with a very long-term view. We have been through many downturns and crises and behave rationally even at unexpected events. There are many global institutional investors with that we have built relationships for more than 45 years and we are proud of it."

▲ What are your thoughts and observations on ESG investments over the past years? 

"ESG is everything about carbon reduction and sustainability. We don't have a specific strategy on ESG as it is incorporated across all of our investments. We are looking closely at property technology, or proptech, that will help reduce carbon footprints.

By region, it has become fundamental in Europe – more countries are putting restrictions on buildings that don’t follow eco-friendly rules. It is moving forward a little more slowly in the US, but a lot of changes have happened.

We also focus on Asia. It is accelerating ESG investments faster than Europe. So, I would guess that Asia is going to be ahead of the west in building environmentally sustainable buildings."

▲ Which regions and asset classes is PGIM Real Estate eyeing in 2023? 

"On region, I think we will look at the UK, Australia, Japan and potentially Korea for the second half of this year depending on how the countries will do over the next six months. We also like Mexico as a small market because it is very strong in terms of export to the US. 

By asset class, we will focus on residential, senior housing, data centers and Asia-located green office buildings which offer a hybrid work environment that attracts their talent back to the office." 

▲ Given the global economic cycle in 2023, what would you say to real estate investors? 

"Stay disciplined but more aggressive. You can invest more aggressively if you have the capital, right strategies and the timing. When you go into a downturn, the rebound doesn't happen smoothly and takes a while. Once it happens, values score up by incredible amounts. 

Many investors fail because they are trying to be too precise. Sometimes they believe the values will go up by 1-2%, and they lose the deal. We start moving when there are opportunities; we won’t lose a deal because of the tiny pricing gap."

Adler is the president and CEO of PGIM Real Estate and the chairman of Private Equity at PGIM, based in London.

Previously, he was global chief investment officer of PGIM Real Estate and earlier served as head of the European business. Before joining PGIM Real Estate in 2010, Adler co-directed Tishman Speyer’s European activities. Earlier, he worked for Morgan Stanley Real Estate, where he led investment activities in Germany, France, Italy and Spain. 

Write to Ji-Hye Min and Jihyun Kim at spop@hankyung.com
Jennifer Nicholson-Breen edited this article.