Article | Intelligent Investment
Henry Chin identifies Australia’s biggest investment strengths and challenges
Crucial commercial property insights from CBRE’s Global Head of Investor Thought Leadership & Head of Research for Asia Pacific.
August 2, 2024
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Advising on the property landscape during a high interest rate environment for an entire region demands proven instincts and a daily pulse on the industry.
Henry Chin is that specialist, and he’s also CBRE’s Global Head of Investor Thought Leadership & Head of Research, Asia Pacific. In his recent Australian visit, Chin joined the Talking Property podcast to share his first-hand insights on the performance and potential of various commercial property sectors in the local market. Here’s what all investors and stakeholders need to know about.
“Higher for longer interest rate environments makes investors very cautious of deploying their money into real estate. It is also hard for the fund managers to raise capital globally to put money into real estate,” says Chin.
“That's why we think this year’s growth might be relatively muted. And at the backend of the year, we're going to see some recovery in terms of investment activities, but the widespread recovery will likely happen in 2025.”
This conclusion stems from Chin’s conservative outlook on interest rates remaining higher for longer. He doesn’t believe that there will be substantial rate cuts in 2024 as the labour market is still hot and inflation is trending down - but it's not yet low enough.
“I don't see how the Central Bank can cut an interest rate in an aggressive manner.”
The number of rate cuts in 2024 is irrelevant and the timing of these cuts should instead take precedence.
“After the rate cuts start, the following 12 months of cuts could be quite substantial.”
The biggest challenge of investing in Australia right now arises from the interest rate cost of borrowing not trending down. In other parts of the world, there’s concern about the pricing between buyers and sellers being too wide. Chin believes that gap in Australia is narrowing down.
“It’s a big issue for other Asia Pacific countries, but in Australia, it's less so because we see deals closing. The asset owners are finally being realistic, and they want to realise the return; they want to dispose. This is great for the Australia market to have such a repricing movement, but interest rates are still number one on the agenda.”
“As of now, Sydney is the only market people should be very excited about. It certainly seems to be one of the top number one focus for a lot of investors.
“12 months ago, no one wanted to look at Australia, but now people are starting to get more interested in its commercial real estate markets. After the Q1 numbers and incoming repricing, I think selling pressure will continue, but we will also start to see more buying intentions coming onto the Australian market.”
“We talk to lots of international, regional, and domestic retailers and this is the first time in years that large amount of retailers are telling us they want bigger spaces; they want to spend more money and they want the core locations,” says Chin.
“They want better-quality assets and I think the rent is going to hold well with good quality assets in good locations.”
From the investor point of view, regional shopping malls in Australia can expect to see a cap rate of around 7%.
“That's attractive. With the rental growth upswing and a high enough cap rate, investors are getting more excited to come into retail in the right location.”
The only caveat? Retail is not for everyone and requires managerial experience to operate.
These are office buildings that are considered best-in-class in terms of design and offerings, with a significant emphasis on occupant productivity and well-being – a perfect example being Perth’s QV1.
“When we are looking at any investment strategies, we need to look at playing the cycle and structural changes,” says Chin.
“I think the office market is highly cyclical and from a cyclical point of view, we believe Sydney's prime CBD office incentives are going to drop and flight-to-quality will continue. If we enter the market in 2024 and hold for three or four years, I think you are going to enjoy the upswing in terms of total returns.”
From a structural point of view, Chin says that occupiers want CBD offices with ESG features, close proximity to transportation hubs and easy parking with EV charging.
“If you overlay all those situations, I believe Sydney prime office in the CBD across Asia Pacific ranks as number one.”
“Their margins and operating model are very different. It's no longer anywhere, any facilities and they target what they want. They want to have modern facilities, be closer to transportation hubs, closer to their market and consumers.
“Green is so important for their mindset. Offices is a given in an Australian context, but for logistics, it's not happening just yet. But, if you have the features, your logistics will outperform.”
This is an Industrial & Logistics trend forecasted back in late 2023 by Sameer Chopra, CBRE’s Asia Pacific Head of Research: “You don’t always see a green premium in a really tight market. But whenever vacancy is a little higher, the number one thing we see is that the best green stock gets leased up, and we typically find that there’s about a 65% advantage in leasing. So, you get about two-thirds more leasing deals done in green stock.”
Henry Chin is that specialist, and he’s also CBRE’s Global Head of Investor Thought Leadership & Head of Research, Asia Pacific. In his recent Australian visit, Chin joined the Talking Property podcast to share his first-hand insights on the performance and potential of various commercial property sectors in the local market. Here’s what all investors and stakeholders need to know about.
Challenge: All eyes on interest rates
The trajectory of interest rates isn’t only a priority for the RBA and Australian mortgage holders. It also has a direct effect on wider investment activity globally.“Higher for longer interest rate environments makes investors very cautious of deploying their money into real estate. It is also hard for the fund managers to raise capital globally to put money into real estate,” says Chin.
“That's why we think this year’s growth might be relatively muted. And at the backend of the year, we're going to see some recovery in terms of investment activities, but the widespread recovery will likely happen in 2025.”
This conclusion stems from Chin’s conservative outlook on interest rates remaining higher for longer. He doesn’t believe that there will be substantial rate cuts in 2024 as the labour market is still hot and inflation is trending down - but it's not yet low enough.
“I don't see how the Central Bank can cut an interest rate in an aggressive manner.”
The number of rate cuts in 2024 is irrelevant and the timing of these cuts should instead take precedence.
“After the rate cuts start, the following 12 months of cuts could be quite substantial.”
The biggest challenge of investing in Australia right now arises from the interest rate cost of borrowing not trending down. In other parts of the world, there’s concern about the pricing between buyers and sellers being too wide. Chin believes that gap in Australia is narrowing down.
“It’s a big issue for other Asia Pacific countries, but in Australia, it's less so because we see deals closing. The asset owners are finally being realistic, and they want to realise the return; they want to dispose. This is great for the Australia market to have such a repricing movement, but interest rates are still number one on the agenda.”
Strength: Asset pricing making Australia attractive again
One significant positive shift Chin has noticed comes from asset pricing over the past 12 months. When compared to Hong Kong and Singapore’s commercial real estate market, he’s happy to confirm that Australia’s market is close to the bottom or already there.“As of now, Sydney is the only market people should be very excited about. It certainly seems to be one of the top number one focus for a lot of investors.
“12 months ago, no one wanted to look at Australia, but now people are starting to get more interested in its commercial real estate markets. After the Q1 numbers and incoming repricing, I think selling pressure will continue, but we will also start to see more buying intentions coming onto the Australian market.”
Strength: Quality is what today’s retailers want
There’s a clear preference for quality assets in the retail space – a trend seen in the ‘flight to quality’ across the office and hotels sector.“We talk to lots of international, regional, and domestic retailers and this is the first time in years that large amount of retailers are telling us they want bigger spaces; they want to spend more money and they want the core locations,” says Chin.
“They want better-quality assets and I think the rent is going to hold well with good quality assets in good locations.”
From the investor point of view, regional shopping malls in Australia can expect to see a cap rate of around 7%.
“That's attractive. With the rental growth upswing and a high enough cap rate, investors are getting more excited to come into retail in the right location.”
The only caveat? Retail is not for everyone and requires managerial experience to operate.
Strength: Prime office is what occupiers want
The flight-to-quality trend also extends beyond the retail sector. In cities like Sydney, prime office buildings are most attractive to occupiers.These are office buildings that are considered best-in-class in terms of design and offerings, with a significant emphasis on occupant productivity and well-being – a perfect example being Perth’s QV1.
“When we are looking at any investment strategies, we need to look at playing the cycle and structural changes,” says Chin.
“I think the office market is highly cyclical and from a cyclical point of view, we believe Sydney's prime CBD office incentives are going to drop and flight-to-quality will continue. If we enter the market in 2024 and hold for three or four years, I think you are going to enjoy the upswing in terms of total returns.”
From a structural point of view, Chin says that occupiers want CBD offices with ESG features, close proximity to transportation hubs and easy parking with EV charging.
“If you overlay all those situations, I believe Sydney prime office in the CBD across Asia Pacific ranks as number one.”
Challenge: Industrial & Logistics need specifics for success
Chin says that today’s strong leasing demand for Industrial & Logistics space comes from manufacturing companies as opposed to previous players like e-commerce and 3PL.“Their margins and operating model are very different. It's no longer anywhere, any facilities and they target what they want. They want to have modern facilities, be closer to transportation hubs, closer to their market and consumers.
“Green is so important for their mindset. Offices is a given in an Australian context, but for logistics, it's not happening just yet. But, if you have the features, your logistics will outperform.”
This is an Industrial & Logistics trend forecasted back in late 2023 by Sameer Chopra, CBRE’s Asia Pacific Head of Research: “You don’t always see a green premium in a really tight market. But whenever vacancy is a little higher, the number one thing we see is that the best green stock gets leased up, and we typically find that there’s about a 65% advantage in leasing. So, you get about two-thirds more leasing deals done in green stock.”