May 2019

Asia Pacific property: Innovation and the disruption of technology M&G Investment Management Limited (MAGIM) and M&G Alternatives Investment Management Limited (MAGAIM) have received notification from the Australian Securities & Investments Commission that they can rely on the Class Order [CO 03/1099] exemption and are therefore permitted to market their investment strategies (including the offering and provision of discretionary investment management services) to wholesale clients in Australia without the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth). MAGIM and MAGAIM are authorised and regulated by the Financial Conduct Authority under laws of the United Kingdom, which differ from Australian laws.

Centropolis, Seoul, South Korea

For Investment Professionals only

REAL ESTATE

Executive summary• Structural changes are presenting

challenges and opportunities for real estate globally

• APAC occupiers and landlords are adopting technological and innovative strategies to overcome these challenges

• Successful strategy implementation should unlock new sources of customer demand, increase space productivity, and improve asset quality

• Real estate investors could thereby benefit from extended investment longevity, added value to their portfolio and more defensive income streams

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.

80 Ann Street, Brisbane, Australia This is an artist’s impression of the asset post-completion.

2

Globally, there are structural people-driven issues that present challenges for real estate, such as an ageing population, labour shortages, changing consumer preferences and climate change. Such conditions are relevant to Asia Pacific (APAC) and their far-reaching impacts are driving real estate occupiers and owners to adapt and innovate to mitigate such issues or translate these into opportunities to gain a competitive advantage.

Alongside such innovation, technology as an enabler can transform the real estate environment and increase the potential value that can be derived from it.

This could be unlocking new sources of customer demand, increasing space productivity and offering opportunities for occupiers to scale up, building upwards to maximise land use and improving asset quality. In this paper, we look at such strategies in detail, consider how real estate in APAC is evolving in response to these structural issues and how this affects the demand, development, and management of real estate. Real estate investors could potentially benefit too, as the implementation of these strategies help to extend the longevity of investments, add value to an existing portfolio and create defensive income streams.

Summary of how technology and innovation mitigate structural challenges for real estate:Occupiers• Ageing population: Improving last mile delivery

with drones or autonomous vehicles could help unlock “silver dollar” for retailers and subsequently extend relevance for logistics in markets with an ageing population

Landlords• Land scarcity: Building upwards in dense cities,

particularly in areas close to consumers and ports for logistics, intensifies land use and provides occupiers access to strategic locations

• Climate change: Incorporating sustainability measures in developments reduces their environmental impact

Potential resulting impact on investors• Expands investment longevity as landlords

and occupiers adapt to structural changes and implement future-proofing strategies to remain relevant

• Creates defensive income streams due to sustained, strong occupier demand and higher operational efficiencies

• Labour shortages: Introducing automation to overcome this, particularly in services-based and warehouse industries, allows businesses to scale up and seek more space

• Changing consumer preferences: Offering end-users in retail and office sectors tailored experiences through digital and physical initiatives helps to bolster occupier satisfaction and improve asset quality

• Adds value to existing real estate portfolio through improved occupier satisfaction and asset quality

3

Ageing population: unlocking the “silver dollar” with convenienceThe region is experiencing a rapidly ageing population, with the median age forecast to continue growing over the next 30 years (figure 1), particularly in Japan and South Korea due to low fertility rates and higher life expectancy.

Figure 1: Median age across economies

Year

s

Japa

n

55

50

45

40

35

30

25

20

Sing

apor

e

Hon

g Ko

ng

Sout

h Ko

rea

Aust

ralia

Ital

y

Ger

man

y

Uni

ted

King

dom

Fran

ce

Uni

ted

Stat

es

1988 2018 2048 (f)

Source: United Nations, M&G Real Estate, as of April 2019.

An ageing population, however, does not necessarily equate to a slowdown for real estate services. With this demographic tending to have more disposable income than the working-age demographic, the retail sector could benefit from this by unlocking this group’s “silver dollar”. One way retailers can encourage more spending among the elderly is through e-commerce, especially as the ageing population is increasingly savvy with technology. For instance in Japan, the proportion of households aged 60 years old and above that have purchased goods and services online has been growing since 2013 (figure 2). As the elderly are typically less mobile, e-commerce offers a more convenient way for them to shop and access a wide range of goods. The introduction of goods delivery via drones or autonomous vehicles would allow retailers and logistics providers to fulfil this growing demand amidst an ongoing labour shortage, particularly amongst the elderly who live in rural or suburban areas.

Figure 2: Proportion of households >60 years old that purchase goods and services online in Japan (%)

12

13

14

15

16

17

18

19

20

21

%

2013 2014 2015 2016 2017 2018

Source: Statistics Bureau Japan, M&G Real Estate, April 2019.

Drone delivery in Japan: reaching both rural and urban consumersTrials of drone delivery are taking place in urban and rural areas of Japan, which has been aided by the government’s relaxation of aviation regulation to support the use of drones and the range of flight. Drone delivery in rural, less populated areas could help seniors requiring people to deliver their daily necessities. This extends the reach of retailers and logistics providers as they are able to reach residents in rural areas more conveniently, particularly in locations where road infrastructure is still lacking.

There is also the possibility of drone flight within urban areas, supported by the Japanese government’s aims and as companies expand the capabilities of drone technology to meet varied needs and all-weather conditions.

The introduction of drone technology could thus open up logistics opportunities, with greater demand for more last mile delivery sites to roll out this initiative. It could also lead to the development of other real estate sectors in Asia Pacific, such as central kitchens for food preparation and delivery or neighbourhood shopping centres acting as drone delivery points for parcel collection.

4

• • • • I • I I I I I • I I • I I • • I I • I I I • • I I • • I

I • • • I • I I I I I I I

I • • I • • I I I I • • I I

I I I I • I I I • • • • I •

• • •

Overcoming labour shortages and gaining scale through automationLabour shortages, particularly in the retail, hospitality, and warehousing industries, is a common issue faced by the developed APAC markets with unemployment rates hovering at relatively low rates for each market (figure 3). According to a 2018 Manpower Group survey on talent shortage, Hong Kong was the third hardest place to recruit talent, with 76% of employers having difficulties filling positions. Japan took the top place, with 89% of employers facing the same challenge.1 This issue is expected to worsen as the population ages.

Figure 3: Unemployment rate across developed APAC Markets

0

1

2

3

4

5

6

7

8

South Korea Hong Kong Singapore Japan Australia

%

2010 2014201320122011 2015 2016 2017 2018

Source: Various government statistics bureaus, Marcrobond, M&G Real Estate, as at April 2019.

Consequently, labour constraints have been cited as a key reason behind why some occupiers cannot lease more space or scale-up at a faster rate. In response to this, more occupiers have turned to introducing automation to reduce reliance upon scarce human resource, increase operational efficiencies and use space more effectively.

Automation in logistics and retailUniqlo automated warehouseAt a warehouse in Tokyo’s Ariake district, Japanese retailer Uniqlo introduced automation provided by Daifaku, a provider of material handling systems, to reduce manpower by 90% and enable 24-hour operation. This automation helps minimise storage costs and deliver products faster. Uniqlo is reported to have plans to automate all warehouses in Japan and overseas.

Automated, unmanned convenience stores/cafes across APACUnmanned convenience stores can be found in China, Japan and more recently in Korea. A significant number of brands in China run such stores there, probably led by Chinese retail giant Alibaba investing in such technology. In Korea, a potential solution to the rising minimum wage is to introduce automation into stores, reducing costs and allowing for 24-hour operation. Technology enables stores to be unmanned. Self-identification is required for access into the store, with verification achieved through scanning palms or credit cards. Self-checkout can be achieved through 360-degree scanners at unmanned counters that can locate bar codes.

Humanoid robots, delivered by artificial intelligence (AI), can also be used to answer simple questions, make product suggestions and guide customers to find them. For example, 1.2m tall humanoid robot Pepper, developed by Japan’s Softbank Robotics Corp., can be found across Asia Pacific, including South Korea. Tested by the largest retailer in South Korea E-mart, the robot offers a concierge service and is able to recognize faces and basic human emotions. This follows E-Mart unveiling an autonomous shopping cart, Eli, for a test run last year, which can follow specific consumers, guide them to products shown on its display screen and take payments.

Not only can innovation and the implementation of technology in the industrial, retail and service-based sector help to alleviate labour shortages, it can also be used to provide a superior customer experience too. Increasing output through higher customer demand and operational efficiencies bodes well for real estate, as this would require occupiers to scale up to enjoy economies of scale. Demand for space, therefore, follows accordingly.

1 Source: Manpower Group, ‘Solving the Talent Shortage’, July 2018.

5

• • • • •

Building upwards in high-density citiesSix of the top 10 most densely populated cities in the world are in Asia – including Singapore, according to data from the UN-Habitat.2 Japan’s capital city has a population of 38.5 million, in stark contrast to the 11.5 million inhabitants of Paris. Providing support to such densification in core APAC markets is advanced infrastructure, regulatory accommodation for the build of high-rises and advanced transport connectivity.

In high-density cities, access to well-located land is limited and often expensive, particularly in areas closer to consumers or ports for logistics. Industrial land prices per developable area are approximately six times greater in land-constrained areas than in land-plentiful ones; Hong Kong records the most expensive land price at US$2,600 per square metre (psm) as compared to US$380 psm in Australia (figure 4).

Figure 4: APAC logistics trends

0

500

1,000

1,500

2,000

2,500

3,000

0

2

4

6

8

10

12

US$psm

Hon

g Ko

ng

Sing

apor

e

Toky

o

Seou

l (Ic

heon

)

Aust

ralia

No. offloors

Hon

g Ko

ng

Sing

apor

e

Toky

o

Seou

l (Ic

heon

)

Aust

ralia

Source: M&G Real Estate, CBRE, as at May 2016.

Building upwards, rather than outwards, allow landlords to unlock more value on each plot of land and create more space in response to rising demand, particularly in ideal locations with scarce land supply. Innovation is required in designing efficient modern logistics facilities, such as our developed warehouse Atsugi Nairiku Logistics Centre in Greater Tokyo, Japan (see box-out).

Introducing automation can also make more effective use of space and increase the output delivered from a logistics centre. This often requires higher quality tech-enabled buildings to accommodate this. Thus, the demand for modern logistics facilities is likely to match, or outpace, supply in the developed APAC markets, which is particularly relevant to Japan and South Korea where institutional-grade assets comprise a low proportion of total warehouse stock. The potential for rental growth from such assets is clear.

Atsugi Nairiku Logistics Centre, Greater Tokyo, JapanOne way to address a shortage of space is to utilise the space more effectively. Our first build-to-core asset in Asia, Atsugi Nairiku Logistics Centre, was completed in 2018 and is four storeys, with both cargo lifts and ramps providing access to the floors. By creating this efficient structure, there was space to add biophilia with a green perimeter around the warehouse. Other environmental features were integrated to run the warehouse more efficiently, such as LED lighting, air conditioning, an efficient water system and photovoltaic (PV) panels. 13,500 sq m of photovoltaic panels are expected to produce around 1,700MWh of energy per year – enough to drive seven times around the world in an electric car. These features have enabled us to achieve the second highest rating, ‘A’, for the Comprehensive Assessment System for Built Environment Efficiency (CASBEE), green certification for Japan.

2 UN-Habitat, Global Urban Observatory, 2018.

Atsugi Nairiku Logistics Centre, Greater Tokyo, Japan

6

KYC: Knowing your consumer to deliver more tailored experiencesThe exponential growth in e-commerce (figure 5) has led to structural changes in the retail sector, driving retailers to adopt omni-channel retailing in order to provide consumers with a frictionless shopping experience offline and online. To attract consumers into retail developments, landlords and retailers are also increasingly offering consumers curated experiences, enabling them to embrace the halo effect, which involves evaluating the interaction between stores and digital channels to optimise their impact.

Figure 5: Total internet-based retail sales in developed APAC

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Internet-based retailing (US$ million) % of total retail sales volume

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

F

2020

F

2021

F

2022

F

2023

F

US$ million

Source: Euromonitor, M&G Real Estate, January 2019.

Leveraging technology can enable landlords to take advantage of the value of customers interacting with their space. Big data can be collated and analysed to help landlords execute more effective targeting of customers and delivery of shopping incentives. Such methods include the implementation of loyalty programmes to analyse customer expenditure and profile or the use of video analytics and algorithms, such as geo-fencing, to track how customers navigate a shopping centre and the dwell-time in specific areas for better space planning and tenant positioning. Using data effectively, it can enable enhancement of the consumer experience, improve asset management and collaboration with tenants. Such optimisation creates a new and more future-proofed retail asset that is resilient and in line with consumers’ expectations.

Using technology to enhance the customer experience in retailTailored targeting of consumers as they shopWe undertook a major refurbishment of our Compass One shopping centre, Sengkang, Singapore in 2015 to better engage with shoppers, increase rental income and target energy efficiency. The atrium level was relocated from level one to two to create retail through the first level where footfall is highest due to the mass rapid transit (MRT) and bus interchange transport links. Human traffic camera counters provide data on footfall hotspots and timing around traffic spikes. This data is used to push promotions onto social media platforms at relevant times, alongside advertising our curated events programme. This allows us to track the engagement rate of each campaign, what is trending amongst our shoppers, and plan better for future online marketing.

Compass One, Sengkang, Singapore

7

1 •1111111111111 • •

Improving wellness in the office sectorAlongside changing preferences for retail to offer a superior user experience, employees are also changing their expectations of the workplace. This has driven a rise in digital and physical initiatives targeted at increasing occupier satisfaction and promoting better health and wellbeing to increase employee productivity, reduce absenteeism and increase worker retention. Technology also plays a key role in attracting and retaining talent, particularly relevant to those mature markets where labour shortages are a key challenge.

Appetite for tech-enabled workspace is being driven by occupiers and their landlords. According to a CBRE survey, 53% of occupiers want a more customised

workplace environment that adapts to the needs of their employees. The majority of landlord respondents (84%) believe that technological innovation will drive stronger demand for smart buildings, which use automation to control varied operations.3 While creating a better environment for workers, smart buildings can also generate energy savings and lower carbon emissions. The international WELL Building Standard®, providing benchmarks for occupier health, wellbeing and satisfaction, has gained credence alongside the firstcomer environmental standards. We were the first in Scotland to register an asset with the standard for our tech-enabled office development in Glasgow, targeting WELL Gold, the second highest rating. For our proposed office development 80 Ann Street in Brisbane, we are targeting a Core WELL rating.

3 Source: CBRE, ‘How technology will redefine real estate – and why companies must prepare now,’ 2017.

80 Ann Street, Brisbane, Australia This is an artist’s impression of the asset post-completion.

8

Connecting with occupiers to provide better servicesLandlords are also connecting with occupiers and engaging them in a variety of ways, including on-site virtual concierge services, events, convenience services and health and wellness programmes.

In Australia, property company Investa have launched a digital occupier portal, Insite, for their developments to offer concierge services, events, meet-ups, news, and offers. This has helped generate better satisfaction among occupiers who work in these office buildings. This is currently being rolled out at our office

400 George Street, Sydney, that we co-own with Investa and is set to be introduced at another co-owned office 40 Mount Street, Sydney.

On the environmental efficiency side, Investa has also launched a customised sustainability tenant toolkit for each development. It is an online platform where tenants can gain insights on how to operate a more sustainable workplace, including environmental performance and occupier productivity. Such initiatives achieved through the collaboration between landlords and occupiers can help achieve mutually beneficial improvements, from both an environmental and cost-saving perspective.

400 George Street, Sydney, Australia

9

Centropolis, South KoreaOur 26-storey, 134,399 sq m, twin-tower complex in Seoul has achieved Leadership in Energy and Environmental Design (LEED) Gold certification (the second highest rating) through integrating a range of environmental features. Photovoltaic panels on both of the towers’ rooftops and Building Integrated Photovoltaic Systems (BIPV) on the exterior and the basement produce 106.8kW, providing energy to power the towers. The on-site production of renewable energy is a priority at Centropolis. An uncommon feature in offices, geothermal heat pumps, with capacity of 185.9kW, supply both chilled and hot water, while thermal ice storage system makes ice overnight for the cooling system. Seven fuel cells use water and natural gas to generate electricity and hot water, generating lower carbon emissions than using a boiler. Greywater recycling treats water for reuse in the toilets.

On-site amenities aim to enhance the occupier experience. There are 16 electric car charging points, supporting the use of greener transport. Shared tenant space in the building will include male and female showers, separate wellness areas for men and women, a nursing room and a conference room for hire.

Centropolis, Seoul, South Korea

Innovation in sustainability measures to reduce environmental impactThe risk of natural disasters, rising sea levels and increased food prices are potential devastating consequences facing APAC if climate change issues are not addressed. According to the Asia Development Bank, 40% of the world’s carbon dioxide emissions are attributable to the region, whilst without radical changes, Asia Pacific will emit 32.5 billion tonnes of carbon dioxide by 2030, equating to 48% of global carbon emissions.4

The impacts of global warming can be mitigated through reducing the carbon footprint of the built environment. This can include the procurement of green energy, on-site generation of renewable energy, installation of smart technology to reduce energy use and low or ‘no cost’ energy efficiency measures. The successful implementation of a host of such features can achieve green certification, a benchmark for sustainability. This has benefits to investors of higher distributable yields from green buildings, as evidenced in a recent M&G Real Estate study,5 while creating greater operational efficiencies.

4 Source: Asia Development Bank, ‘Climate change in Asia and the Pacific’, November 2017.5 M&G Real Estate, ‘Green buildings: what are the financial benefits?’, November 2018.

10

ConclusionThe APAC real estate market is evolving in response to structural changes. Such issues could be considered as equating to a negative impact on the demand and supply of space, such as the ageing population worsening scant labour supply and land shortages. However, these can present new sources of demand and the potential for technology and innovation to optimise the space used and offer opportunities for occupiers to scale up through the integration of automation, eventually boosting demand for space.

Changing consumer preferences are for real estate to supersede the functional bricks-and-mortar to offer

a service to their end-users. This is epitomised in the emergence of omni-channel retailing and growing importance of wellness in the office environment. Innovation and considered execution of technology can be used to deliver a superior user experience, thereby increasing asset quality.

In addition, creating more efficient, cleaner and greener buildings can help tackle climate change, where APAC has a significant part to play. By future-proofing our assets to make them more resilient and environmentally-friendly, this not only has benefits for our investors, but for occupiers too in achieving greater operational efficiency.

400 Mount Street, Sydney, Australia

11

For Investment Professionals only. The distribution of this document does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you should ensure you understand the risk profile of the products or services you plan to purchase. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Opinions are subject to change without notice. Map data: Google. ** Notice to investors in the Netherlands: This document does not constitute investment advice or an offer to invest or to provide discretionary investment management services. Notice to recipients in Hong Kong: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Notice to investors in Singapore: For Institutional Investors or Accredited Investors only. Not for onward distribution. No other persons should rely on any information contained within. This advertisement has not been reviewed by the Monetary Authority of Singapore. M&G Investments (Singapore) Pte. Ltd. (Co. Reg. No. 201131425R) may distribute information/research produced by its respective foreign affiliates within the M&G Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the information/research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, M&G Investments (Singapore) Pte. Ltd. accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact M&G Investments (Singapore) Pte. Ltd. at (65) 64365315 for matters arising from, or in connection with the information distributed. This information/research is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our investment product prices, or an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. Notice to investors in Republic of Korea: The information contained herein is for general informational purposes only, and should not be regarded as marketing or solicitation of the services. M&G is not currently registered in Korea as a cross-border discretionary investment management company, and is not permitted to provide such discretionary investment management services until it is duly registered with the Financial Services Commission or applicable exemptions apply under the Financial Investment Services and Capital Markets Act of Korea. M&G Investments and M&G Real Estate are business names of M&G Investment Management Limited and are used by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and Wales under number 936683 with its registered office at 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. M&G Real Estate Limited is registered in England and Wales under number 3852763 with its registered office at 10 Fenchurch Avenue, London EC3M 5AG. The M&G Group of companies are indirect subsidiaries of Prudential plc of the United Kingdom. Prudential plc and its affiliated companies constitute one of the world’s leading financial services groups and is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America. APR 19 / WIM2694

ContactJonathan Hsu Director, Head of Research, Asia +65 6436 5353 jonathan.hsu@mandg.sg

Eunice Khoo Senior Associate, Property Research Asia +65 6436 5362 eunice.khoo@mandg.com

Richard Gwilliam Head of Property Research +44 (0)20 3977 0980 richard.gwilliam@mandg.com

Ryan Ho Manager, Investment and Product +65 6436 5314 ryan.ho@mandg.com

UK

Lucy Williams Head of Investor Relations and Business Development +44 (0)20 3977 1035 lucy.williams@mandg.com

Germany

Ingo Matthey +49 69 1338 6716 ingo.matthey@mandg.com

The Netherlands

Stefan Cornelissen +31 (0)20 799 7680 stefan.cornelissen@mandg.co.uk

Nordics

Robert Heaney +46 702 644 424 robert.heaney@mandg.co.uk

Italy

Costanza Morea +39 3440 408 396 costanza.morea@mandg.co.uk

France

Florent Delorme +33 (0)1 71 703088 florent.delorme@mandg.fr

Spain

Alicia Garcia +34 915 615 257 alicia.garcia@mandg.com

Switzerland

Manuele De Gennaro +41 (0)43 443 8206 manuele.degenna@mandg.co.uk

Australia

Christopher Andrews +61 417 573 157 chris.j.andrews@mandg.com

www.mandgrealestate.com