Article | Intelligent Investment
Where Australia's leading fund managers are investing for growth in 2024
Two of the region's top investment and fund management firms share their predictions and investment strategies for the year ahead.
February 14, 2024
The Australian property sector is expected to offer new opportunities in 2024. We spoke with two of the region's top investment and fund management firms to learn about their predictions and investment strategies in the year ahead on CBRE’s latest Property Predictions 2024 podcast.
Michelle McNally, CEO of Aware Real Estate has $2 billion in property under management and a development pipeline valued at over $3 billion. She also leads the strategic performance and management of Aware Super's directly owned Australian property portfolio.
Adding crucial investment insights to this conversation is David Southon, executive chairman of Aliro Group, an entrepreneurial Australian property development, investment, and funds management group with $3 billion in funds under management and total forecast Gross Asset Value on completion of $7 billion.
“Cost of capital has been elevated and we see that the transactions will come through and meet the return requirements that ourselves and other investors have. We're particularly interested in income-generating assets,” she says.
“In the industrial sector, for example, I think you'll be able to access better returns without the development risk.”
While there will still be some development challenges in both the industrial and residential markets in terms of planning and construction risks, McNally sees good tailwinds in residential, supply challenges, immigration, and a growing economy.
“I think it shouldn't just be one form of housing we're looking at here. It needs to be a really diverse range of housing across all locations. There's as much need in regional Australia as there is in our cities as well. And so, we've got a big task ahead of us over the next five to 10 years to supply the housing that we need. But it's really positive to see changes happening at the state government level in planning that should facilitate a greater level of investment in residential.”
“They're obviously very different sectors with industrial being a very well-established sector here in Australia and build-to-rent being an emerging sector. One thing that is common for these two sectors is just the demand relative to supply,” he explains.
“We've got an undersupply in both of those sectors, very tight markets, and that's really driving rental growth and, ultimately, total returns.”
Aliro Group’s focus on the build-to-rent sector is reinforced by the notion that it delivers a product that is institutionally backed and has a brand around it from an operational perspective for the circa 33 percent of Australians who rent.
“I think that as we see that sector really emerge, we'll see more local capital get behind it, which will be a significant change. The early movers are typically backed by global investors who see this sector really working well in other parts of the world.
“I think we'll see it continue to emerge strongly here in Australia. We really need it. There's a significant undersupply of residential stock relative to the demand, particularly with our immigration aspirations here in Australia. We've got to provide accommodation as affordability is a real issue.
“Some of the inflationary pressures that we're seeing coming through is impacting the build-to-sell product as well. Gone are the days when you could just sell 80-90 percent of your apartments with a 10 percent deposit and hope you could deliver them for the cost that you thought you could. That is putting a real lid on the supply of stock, which is impacting affordability.”
"We intend to have a more diversified funds platform going forward, and as we see deep value emerge in the office sector, that's something that we expect to be doing more with as well,” he says.
“At the moment, ‘office’ is a bit of a dirty word in real estate. Most investors, institutional investors, are overweight office. In other markets around the world there have been significant resets in value that we really haven't seen here in a meaningful way as yet.
“Australia typically is a laggard market, so it does take a little bit longer for things to filter through, but what I think we will see over 2024 is some deep value emerging in the office sector as the valuation reset comes through.”
Southon believes that there'll be an opportunity to access the markets that are usually tightly held in Australia.
“There'll be an opportunity to access product in the gateway markets, particularly for global investors who want to hold iconic CBD buildings. I think you'll be able to buy those buildings at a discount to replacement cost and in some instances, possibly even at a discount to construction costs. In other words, wiping the value of the land out altogether.
“I know that sounds a little dramatic, but for some of the secondary assets, we are already starting to see a little bit of that emerge because if it is a secondary asset, you have to really think about whether it's reached the end of its lifecycle, and if it has, then the improvements actually have a negative value.”
McNally highlights AI and how it will change the way we work, shop and live, while Southon underscores the need for agility alongside the need to keep the doors open for global capital in helping Australia’s growth.
To hear their full take on their property predictions for 2024, listen to the podcast episode below.
Michelle McNally, CEO of Aware Real Estate has $2 billion in property under management and a development pipeline valued at over $3 billion. She also leads the strategic performance and management of Aware Super's directly owned Australian property portfolio.
Adding crucial investment insights to this conversation is David Southon, executive chairman of Aliro Group, an entrepreneurial Australian property development, investment, and funds management group with $3 billion in funds under management and total forecast Gross Asset Value on completion of $7 billion.
Industrial and residential sectors will see better returns
According to McNally, the bid-ask spread experienced in 2023 has narrowed, meaning we should start to see transactions flowing and matching the reset cost of capital requirements.“Cost of capital has been elevated and we see that the transactions will come through and meet the return requirements that ourselves and other investors have. We're particularly interested in income-generating assets,” she says.
“In the industrial sector, for example, I think you'll be able to access better returns without the development risk.”
While there will still be some development challenges in both the industrial and residential markets in terms of planning and construction risks, McNally sees good tailwinds in residential, supply challenges, immigration, and a growing economy.
“I think it shouldn't just be one form of housing we're looking at here. It needs to be a really diverse range of housing across all locations. There's as much need in regional Australia as there is in our cities as well. And so, we've got a big task ahead of us over the next five to 10 years to supply the housing that we need. But it's really positive to see changes happening at the state government level in planning that should facilitate a greater level of investment in residential.”
Build-to-rent is poised for growth in 2024
For Southon at Aliro Group, there are tailwinds for two growth sectors continuing into 2024 – the aforementioned industrial and build-to-rent.“They're obviously very different sectors with industrial being a very well-established sector here in Australia and build-to-rent being an emerging sector. One thing that is common for these two sectors is just the demand relative to supply,” he explains.
“We've got an undersupply in both of those sectors, very tight markets, and that's really driving rental growth and, ultimately, total returns.”
Aliro Group’s focus on the build-to-rent sector is reinforced by the notion that it delivers a product that is institutionally backed and has a brand around it from an operational perspective for the circa 33 percent of Australians who rent.
“I think that as we see that sector really emerge, we'll see more local capital get behind it, which will be a significant change. The early movers are typically backed by global investors who see this sector really working well in other parts of the world.
“I think we'll see it continue to emerge strongly here in Australia. We really need it. There's a significant undersupply of residential stock relative to the demand, particularly with our immigration aspirations here in Australia. We've got to provide accommodation as affordability is a real issue.
“Some of the inflationary pressures that we're seeing coming through is impacting the build-to-sell product as well. Gone are the days when you could just sell 80-90 percent of your apartments with a 10 percent deposit and hope you could deliver them for the cost that you thought you could. That is putting a real lid on the supply of stock, which is impacting affordability.”
The Australian office sector shouldn’t be overlooked
One sector that Southon isn’t shying away from like many is office real estate."We intend to have a more diversified funds platform going forward, and as we see deep value emerge in the office sector, that's something that we expect to be doing more with as well,” he says.
“At the moment, ‘office’ is a bit of a dirty word in real estate. Most investors, institutional investors, are overweight office. In other markets around the world there have been significant resets in value that we really haven't seen here in a meaningful way as yet.
“Australia typically is a laggard market, so it does take a little bit longer for things to filter through, but what I think we will see over 2024 is some deep value emerging in the office sector as the valuation reset comes through.”
Southon believes that there'll be an opportunity to access the markets that are usually tightly held in Australia.
“There'll be an opportunity to access product in the gateway markets, particularly for global investors who want to hold iconic CBD buildings. I think you'll be able to buy those buildings at a discount to replacement cost and in some instances, possibly even at a discount to construction costs. In other words, wiping the value of the land out altogether.
“I know that sounds a little dramatic, but for some of the secondary assets, we are already starting to see a little bit of that emerge because if it is a secondary asset, you have to really think about whether it's reached the end of its lifecycle, and if it has, then the improvements actually have a negative value.”
The full story and additional considerations
The duo also provided their take on transformational opportunities coming into the new year.McNally highlights AI and how it will change the way we work, shop and live, while Southon underscores the need for agility alongside the need to keep the doors open for global capital in helping Australia’s growth.
To hear their full take on their property predictions for 2024, listen to the podcast episode below.
Australia’s 2024 Property Predictions: Episode 3
In this episode we chat with Aware Real Estate’s Michelle McNally and Aliro Group’s David Southon.
