In 2021, CapitaLand split its development and funds management business into CapitaLand Development (CLD) and CLI. The development business is unlisted, while the listed entity primarily focuses on fund management and investment.
Since its listing, according to CLI’s annual report, the fee income-related business (FRB) segment’s contribution to CLI’s total operating patmi has grown, from 40% in FY2021 to 62% in FY2024.
Tham says: “We’re going through a journey to change where our earnings come from. If you looked at last year’s results, it’s moved to about 50:50; 50% of our earnings come from the investments we have in properties or REITs and funds, and 50% of our earnings come from the fee business, which is fees from our private funds, listed funds, commercial and lodging management.”
In FY2024, revenue from FRB was $1,169 million, up 9% y-o-y, and revenue from the real estate investment business (REIB) dipped by 21% to $1,864 million. Operating patmi from FRB in FY2024 was $350 million, up 10% y-o-y, while operating patmi from REIB fell by 21% y-o-y to $215 million. In its 1Q2025 business updates, revenue from FRB rose by 3% y-o-y to $281 million while revenue from REIB fell by 6% y-o-y in 1Q2025 to $242 million. CLI will announce its 1HFY2025 ended June financial results on Aug 14.
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“The key for us to be able to maintain and grow our dividends is to be able to grow the fee business faster. Growth comes from two sources. As we grow the existing funds, whether they’re the REITs or the private funds and they raise new money, we get increased earnings. The other part is that we are pushing growth in these new areas, such as private credit. We think as this grows, it should make up for the loss of income from the properties we’ve divested,” Tham describes.
Private credit backdrop
In terms of sectors, CLI will focus on private credit to real estate. “Given our heritage, we’re much more comfortable with real estate credit,” Tham indicates.
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With the regulatory side in Asia maturing and strengthening, coupled with the region’s natural demographics, the Asia Pacific could look very attractive for private credit, Tham suggests.
He points out: “Asia Pacific valuations are increasing. Valuations increasing is great for equity, but it’s also great for lending. It means the lending market is naturally growing. Across markets like Korea and India, we see valuations moving up, which helps the market to grow naturally.”
According to a 2023 CLI report on private credit, Catalyst for Change, several market forces at play will continue to push private credit into favour. Previously tightly-held loan books will start to ease into the secondary market as mandatory capital regulations weigh on banks, which are also seeking to diversify their portfolio risk.
On the regulatory front, banks in certain jurisdictions are moderating their exposure to commercial real estate (CRE) due to either excessive CRE exposure or changes in capital requirements for CRE, such as increased risk weights under the Basel III framework.
“At the same time in Asia, we are generally seeing improvement of enforcement of regulations,” Tham says.
According to Serene Chen, Asia Pacific head of credit, currency and emerging market sales at JP Morgan, the next region of growth for private credit is likely to be Asia Pacific.
“Asia is driving over 50% of the world’s GDP growth; China, Japan and India are among the biggest economies. The overall public debt market in Asia is approximately US$1.5 trillion ($1.92 trillion). We are at the beginning stage of Asia private credit compared to the US and Europe,” she says. JP Morgan’s Asian private credit business started in 2019.
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“In Asia, everybody loves real estate, but they’re usually invested in the equity component of it. In the last few years, we’ve noticed a distinct change among investors. People have started engaging more and more and learning about private credit, because it’s a little more nascent in Asia,” Tham says.
As investors become more familiar with private credit, the sector is likely to generate its own momentum. “As more investors are looking at private credit, it gives you two things: the ability to do more deals, which helps grow the market itself, and it also provides liquidity for other investors. As investors enter and exit positions, other investors are willing to take on those positions,” he reasons.
For real estate, the most popular form of private credit is direct lending. “Loan duration is three to five years and borrowers are anxious to pay you back. That gives the private credit fund natural liquidity,” Tham says.
In Catalyst for Change, direct lending in real estate is cited as the preferred strategy for institutional investors. It allows them to navigate and gain familiarity with the diverse jurisdictions across the region without having to move up the risk curve to establish relationships with relevant managers and local networks, the report said.
Distressed funds are those where corporate debt is trading at a significant discount, and holders seek to generate returns through restructuring or asset sales. Conversely, dislocation funds serve to capitalise on significant and temporary disruptions in the broader real estate market. Special situations funds focus on value opportunities arising from specific events such as shareholder disputes and corporate refinancing.
Since private credit is positioned higher in the capital structure and typically comes with collateral, it is viewed as less risky than equity and hybrids.
“From a risk perspective, we’re not too perturbed in the instances where we have a workout situation. If it’s a default, it goes into what we would consider a workout. We would approach it in two ways. One is that, generally, our preference is for our borrowers to do well and be able to repay us. Often, we’ll work very closely with the borrower to find a solution,” Tham explains.
In cases where construction of a property development takes longer than initially estimated, CLI will work with the borrower to adjust certain terms. “This is the flexibility private credit has, which banks don’t necessarily have. We’re able to customise a lot more because we’ll know the asset and we’ll know the borrower quite intimately,” Tham says.
“In the very worst-case scenario, where the borrower defaults, we can take the property. That’s why we focus only on Asia Pacific real estate,” Tham says.
Market size
“Private credit can go up to anything between 50% to 75% of the market in the US. In Asia, and Australia, it’s a single-digit percentage, but in a market like Korea or Singapore, it’s less than 1%,” Tham points out. “We expect that to grow over time, and it’ll just coexist alongside bank lending. Our hope is that the Asia market will grow to be somewhat more like Europe, reaching 10% to 20% of the market. If that were to happen, that’d already be tremendous growth for real estate private credit.”
According to the Global Annual Private Debt Report 2024 by PitchBook, one of the global trends likely to persist this year is partnerships between banks and private debt fund managers. In 2024, Citigroup and Apollo announced a US$25 billion private credit partnership with Apollo. Webster Bank announced a venture with Marathon, while Wells Fargo announced a US$5 billion partnership with Centerbridge Partners. JPMorgan Chase also announced that it will allow a select group of private credit lenders to invest alongside it in its deals, in exchange for fees.
In all, private market data provider LCD (Leveraged Commentary & Data) tracked 17 bank and private credit lender partnerships in 2024, up from just three in 2023, PitchBook observes.
Another trend, according to Schroders, is that insurance funds and pensions funds in developed markets are increasingly turning to private credit for yield. “Changes to capital frameworks over recent years have prompted insurers to explore a broader range of asset classes. Their objectives are clear: to source stable, risk-adjusted yields to match long-term liabilities, while achieving efficient capital charge ratios,” Schroders says in a July 10 report.
Asia’s private credit AUM is very modest compared to that of the US and Europe. According to PitchBook, total private debt AUM in Asia (excluding Australia) in FY2024 stood at US$62.3 billion compared to US private credit AUM of US$1.226 trillion and the European private credit AUM of US$499.5 billion.
Private credit is a relatively modest part of CLI’s FUM, at $3 billion, compared to its FUM of $117 billion as at 1QFY2025. So far, CLI has completed deals in the developed Asia Pacific region.
“We’ve done a hospitality asset in Australia, residential in Adelaide, office in Seoul, as well as a credit position in a data centre in Korea. In Seoul, we have two equity positions as a group in data centres and we also have a one-credit position in Korea. We did residential in Hong Kong,” Tham says, referring to the outsized return on a mezzanine transaction which made more than 20% in a matter of months.
For now, CLI’s credit funds have been cash-on-cash. Unlike some of the large PE firms, CLI targets to hold 10% to 15% stakes in its private funds, Tham indicates. To give an idea of the type of returns private credit provides, this year CLI completed the acquisition of Wingate, which has funded 373 properties over the past 20 years with an average net return of 11% per year since inception. “We would expect to get to low double-digit returns for most of our funds,” Tham says.
Are there any targets for CLI’s private credit FUM? In November 2024, during its Investor Day titled Forging Ahead, CLI’s management including Tham, emphasised that the group “will drive growth-focused use of its capital to achieve its target of doubling FUM to $200 billion by 2028 and aims to raise operating earnings by over two times to more than $1 billion by 2028–2030”, with 60%–70% coming from its four FRBs.
“We would love for private credit to be at least 10%, or $20 billion to $30 billion of that stack,” Tham says.
Since private credit in Asia is in its early stages — just as REITs were back in 2002 — that should prove an achievable target, market watchers say.
