Transcription
I'm Nina Trentmann, senior editor with Bloomberg News and host of Bloomberg's CFO Briefing, a newsletter for and about CFOs around the world. Paul and I got to speak earlier, so it's good to have you again. Paul Thomas, the CFO of Singapore based Capitaland. For those of you who I guess you all familiar, but for those of you who don't know, it's it's a real estate investment company with assets in over 45 countries and 270 cities. So a big, big presence.
Paul, we have only 20 minutes, so I guess we'll jump right in. You've laid out multiple sustainability targets to be achieved by 2034 Capitaland I think you hit your water consumption targets ahead of time. Just curious how you're thinking about the rest of the targets and also which ones are the hardest to achieve. I did know that carbon emissions have actually gone up in recent years.
Shucks, we were hoping nobody would catch that. Now I think we so we set these targets in 2019. To be fair, our business strategy changed a little bit. At that point, we were really a property developer. And over the last few years, we decided we would pivot to be to really focus on asset management. For us, that means growing from the 90 billion assets we manage, ideally to us 100 and 6070 billion. So the growth is faster than we had originally planned, which we realised impacts our goals quite a fair bit as well.
I think following the last panel, there are certain challenges that you mentioned that impact us as well. So I think just as you said on terms of water efficiency, you know, all taken care of in Singapore, relatively easy to do, which is one third of our portfolio on the waste component. Also generally something that we've been able to achieve over time in terms of waste efficiency. We're still working on our recycling component, but we think that's manageable.
I think the two parts that are a little trickier for us is one is the renewables component. So we had a commitment that we would get to 45% renewables by 2030. And obviously the fact that we are Asia based means we've got slightly different challenges in different markets. So in India generally, we think that is more than doable. We have in fact we have our own captive, a solar plant for one of our business parks there. As we grow the business, we do think that geography can be easily managed. Similarly, for China, we believe we can match that quite well. The big challenge for us is one third of the portfolio that sits in Singapore and for the Singapore component, I think we need a little bit of help from the government in terms of some of the initiatives that they are running to make this more workable.
The other two things that we consider in order to make that renewables one work is one is we are looking at a lot of new technologies. So we run a sustainability challenge where we invite companies from all around the world to propose solutions that innovative for building technology. And I think we've seen quite a number, most of them have. We have started to use a number of them in our properties. So whether it's waste to use that for building pavements, you know, low carbon materials, all of this I think is helping us get there. But we still have a little bit of a gap and I think that will take policy change for it to work for us. As I joke with the team, our last fallback solution to hit our targets is in 2029, we're going to sell all our data centers. I guess we'll we'll see whether that happens.
I'm just wondering, actually, for you as a CFO, you, of course, focusing a lot on non-financial results, allocating capital. I'm just wondering, like in terms of your role towards the company achieving the sustainability targets, how would you describe that and how involved are you in this process?
So. So I sit on all of our investment committees and a lot of our asset planning, but I'm not sure how many CFOs there are in the room. But I was joking with my team the other day that, you know, CFOs are the most likely to be the worst people to deal with, with the most skeptical people tell us this is the revenue projections. We give them a raised eyebrow. They tell us this is how they were going to achieve costs. We don't believe it. We've got to be the absolute worst people to work with at times. So it comes with a natural tension. Unfortunately, I think there are two pieces to this. I would say one is CFO job is always to manage capital, make sure we're optimizing, we're being efficient. And I think that becomes the challenge on the sustainability side is proving that the investments make sense holistically for the company strategically as a group capital. And I think we're very clear that this is something that's important to us. Fundamentally. We do actually believe that good quality green buildings are good business investments and also good for the environment. So I think that part strategically is easy enough. The problem always comes when everybody comes by with a request for green CapEx and then things get a little bit tricky.
So we have actually we've just rolled out we have a return on sustainability framework. So this is as you have for most property investments, you try and get a return level. So we have our own system now where we account for a number of factors relating specifically to real estate. So how much impact will there be on utility savings? How much will you get a green rent uplift? What might your potential exit be? How much interest savings will you get from the sustainability linked financing? And we factor all these components in now when we're able to assess whether the investment makes sense, I would say based on sort of the trial test case and I give it to the team, they've really done a good job trying to make this work. But so we look at, say, six buildings and we can tell you that four of them, the green investments were and two of them don't, which to me is a better indication that this is a framework that potentially works rather than one that tells you everything what's right or everything does. And so I think we look at it that way, but it's still individual investment based because I think a lot of our LPs and our investors expect that while we may have an overall principle on how we want to approach this, the economics for them as investors has to make sense.
Hmm. Yeah, it's certainly, of course, an interesting time for ESG and sustainability. Right now. I'm based in New York, the country in which the year in which President Trump got reelected and in which there's a bit of a pushback and pull back, I would say, from from sustainability across the board, not just from the government, but also from from businesses. I'm wondering with the US being such an important market for for companies around the world, like what's the impact you think on businesses in Asia? Like did you does this this U.S. pullback influenced decision making for you at all? Is it noise? How do you think about it?
So we definitely hear about it a fair bit from our investors on both from the public side and the private side, I would say. So it ties back strategically. We think having high quality green buildings makes sense in all the markets way. And so I think for us the decision becomes relatively clear. The challenge really for us is, as I mentioned on the individual investments, we have different LPs or different investors for each fund and you know, it changes a little bit. I wouldn't say this most recent incident or challenges coming from the noise from the US is the first time this happened. If, you know, if I look back the last five, six years from a sustainability viewpoint with investors, I remember 2018, 2019 and in this role and in previous roles, I've always generally done a lot of the public investor engagement. So I probably do 51 on ones a year with public investors. And we during 2018, 2019, we get a lot of questions about sustainability. I remember that most meetings somewhere between financials, rent reversion, somebody would ask a question or multiple questions on sustainability. When we went into COVID, I remember distinctively it went absolutely quiet. We didn't take a single specific question, and I think it was for ten months. I only remember because at the end of ten months somebody asked me the sustainability question. I couldn't remember the answer because at the time every body was purely focused on how the business was going to survive on tenants coming into buildings. You know, people in your retail malls, how do people get to the office? So there was a lot of focus then. And during that stretch I would say we saw interest in from investors in the sustainability component on, you know, particularly the E component of ESG really waned and we saw that pull in interest, but it didn't change our investments particularly. I guess for us, the investments tend to be 5 to 10 year investments. So I think we we held the cost during that process. During that time period and over time the interest came back particularly of. European investors probably being the strongest on this. And then U.S. and Asian investors. So most recently now, obviously, we still take this question a lot from European investors in particular. And the US side certainly has pulled back a lot. Pull back to the point where we have realized we're better off not raising the topic just so that we don't get any pushback. But I would say from a principle basis, it hasn't actually changed the way we look at the investment. We're still in the same course as we were over the last five years. And so but in conversations with specifically U.S. investors, it has proven that it's better to just not bring it up. So far, the U.S. investors that we engage with, they've always been much stronger on the S&P components, which we also do appreciate. They'll spend time talking to us about for building construction, about the LIBOR that is used, about the governance in particular for the companies or the joint ventures we work with. So they've always been stronger that component on the environmental component. These days, generally, they tend to be very quiet and unless it's raised, we, we won't be the ones to bring it up.
Well, I guess if it doesn't get you any points with them, then it's probably a smart move. I'm just wondering, actually, in terms of your financing strategy, I know that you've in the past issued green bonds, both on the rate level as well as on the corporate level. I'm just wondering, with the decline in the green room, basically the cost benefit that used to exist between issuing green bonds or sustainability linked bonds and plain vanilla bonds, with that vanishing, does it still make sense for you to use these these financing instruments or not so much?
So from a pure financing viewpoint, generally, I would say we've seen it come down over the last seven or eight years. I think when we first did green bonds, we used to see maybe a 5 to 10 basis point spread between, say, one of our typical five years versus a green five year bond for us. So we've we noticed that come down from 5 to 10 down to 2 to 3 basis points. I would say these days, actually, it makes almost no difference if we go out. So from a financial viewpoint, there's been a little bit less benefits to that. I think the market's got a little bit more use to making sure that there's a either sustainability linked component or that the company has the right focus on ESG, particularly for real estate in Singapore. And I think this would be different if we will, issuing our bonds in Malaysia or in India or the US, where we would see a little bit of difference. But Singapore market's a little bit saturated. And so we definitely don't see that. But we still do continue, and I'll have it for the entire group at and for all of our rates. We do this partly as discipline for ourselves. We like to keep a proportion of our bonds, our sustainability linked, so that we don't drift away from it completely. And quite honestly, I think having the framework in place also makes us and the Treasury team a little bit more aware of how the market considers these things and why. It's also important for us to make sure that we are checking the box in some of these areas as well.
Hmm. We have hosted the CFO roundtable this morning and one of the themes that came up was, was this question around sort of do we need a carrots or do you need to stick to get companies to to comply with standards like scope one and two and three? Or does it also like is there also an end to to that, given that, of course with more requirements come come costs and with costs comes the question of like, why are we doing this? I'm wondering how you're thinking about this.
Yeah, needless to say, if there were any government officials in this room, you know, we always support the carrot method. Tax incentives are our favorite thing. So so suddenly that would help. I think the any form incentives would certainly be welcome. I think any company would have that in any aspect, though I would say particularly for sustainability, though, the truth is for ourselves, actually we quite like the idea of stronger regulations and stricter controls just to level the playing field. You know, for ourselves, we we follow different frameworks for different buildings in different countries and Singapore, the standards vary. One of the biggest complications for us is multiple jurisdictions, different frameworks and different criteria to look for in different ways for for things that we have to check off when we I'm trying to make sure that our buildings are upgraded to the right standard. And we also find that there is a little bit of inequality. Quite honestly, I would say for a lot of the big fund managers or property players, we try to keep to a certain standard because we do believe that and we for us, we there's a degree of responsibility to set what is the right benchmark level. But then very often we'll find potentially smaller companies or companies looking for a different edge, trying to give up on some of these areas. And then we end up going to whether it's the same investors, the same LPs, and all of a sudden our returns may be a hair lower or we may have underwritten it and stuff as such, because I can tell you, and for those of you in Singapore, for instance, you know, when you try to lease up a building in Singapore, there is everybody has certain requests on what they would like on the building. And very often we always get asked about green certification and the green aspects of the building. But then when we have the discussion on rent and we tell them it is 0 or 0.05 for that little bit of difference, all of a sudden we get a lot of pushback. So actually having a standardization on the requirements and the metrics, particularly across multiple jurisdictions and for sustainability reporting actually would help us very much.
Hmm. You mentioned earlier this term green CapEx, and it sounded as if to some degree sort of of course, that's something that you allocating capital towards. But it also sounds as if that's sometimes difficult given that there's a lot of asks and. Probably not all meets. Meet your return on investment criteria? Just talk to us about how you navigating that.
Yeah. So obviously we look at different types of CapEx. There is CapEx for a building which we would say is absolutely required. This is changing the maintenance on a live system. I know the last thing we want to do is get anybody stuck in the elevator moving up and down. So those for us are critical CapEx that will get refreshed on a regular basis. Green CapEx sometimes falls in that bucket, sometimes it does. And this is for us any anytime of type of capital expenditure that will improve any of our environmental sustainability, help us in achieving any of our environmental sustainability targets. So this could be improved chillers. This could be a better building management system. All of these have different ways of optimizing where is optimizing our power usage, optimizing our lights and chiller systems, and that comes definitely to a degree of benefits. The tricky part being that some of these some of these, for instance, our chillers, they may not be that all right. And you know that the life cycle is you can run these for five more years. But are they any energy efficient? Probably not as much as a top of the line one would be. So they become very individual financing decisions. And when we look at that, it's then a question of, okay, are there other alternatives? And this is why we spend so much time on technology. If other additives that we can use, you know, other polymers or or films that we can use to kind of streamline some of this equipment and make it more efficient without having to do a full CapEx refresh on that. I think we spend a lot more time discussing this than we used to. It used to be a pretty straightforward discussion and that's one of the reasons we put the return on Steel Ability framework in A was to give us a tool that can really help measure some of these aspects.
Hmm. You mentioned this this premium for for green buildings and the question of the back and forth with with potential tenants wanting a lot of it, but then being surprised by the price of it. Has that conversation changed at all in the past year or two? I'm just wondering if this sort of in certain parts of the world, maybe more ambivalent position towards ESG and sustainability is also impacting clients, or if, for example, the somewhat more uncertain economic environment is leading, maybe more of them to say you don't need all that green stuff, so suddenly it is defer by market, you know, and we see that based on the premiums we see in buildings, that in a market like Europe, we'd see higher premiums 5 to 10% for that, partly because there's a wider group of all the stock in the market and not as many green or higher end buildings. So you tend to see a premium for that. In Asia, it's very diverse. In a market like Singapore, there is almost no premium for a green building, partly because a lot of our buildings here and you know, somewhere along the way the governments offered us additional floor area. If we tear it down and we rebuild it, so we tear it down and we always rebuild it new and green. So you at most see a 1 to 2% premium in a market like this. So I would say part of that is fundamental to the different geographies and that impacts how much of a green premium you get in a market like Australia, for instance, you generally will get better returns on it because there is more focus on ESG and that desire. So that part becomes a little bit stronger. But I think the challenge for real estate right now is across the market. It's been a tough few years for real estate. I would say this is globally, it's been challenging for real estate. So I would say that premium has shrunk, but I don't think that can necessarily be isolated to less of a focus on ESG as much as is is everybody is looking to see any way that they can get a better return on investment. So I think ESG and sustainability gets impacted just as much as everything else from that lens.
Right. We have about a minute left. I'm just curious if you could talk to us a little bit about your outlook for the industry. We talked earlier about the outlook for China. I'm just curious, with you describing the tough years behind the industry, like, should we expect some some recovery this year or next?
Oh, we're certainly hoping the second half of the year will be better than the first half. First half was challenging first quarter of the year. I think we were all very positive on the outlook for the second quarter. Everything got put on hold. I haven't seen such a slow transaction yet from real estate in at least 15 years. I would say second quarter was incredibly unusual. I think people have a little bit more positivity and confidence going forward, or at least a degree of certainty that the second half is a little bit more stable. So I think we're going to be much more active ourselves, which will be good for the company. And I would say that's likely that the rest of industry will be like that too. So I think much more positive for second half than the first half.